Honda: Moving to the Fast Lane?

05/03/2017 2:50 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Honda Motor (HMC) is the third largest Japanese automaker and the eighth largest in the world, observes Gavin Graham, editor of Internet Wealth Builder.

It produced just over five million cars and light vehicles in 2015-16. It is also the world's largest motorcycle manufacturer, producing 18 million motorbikes as well as mowers, power tools, ATVs, and, most recently, a prototype business jet.

Interestingly, it is now much more a North American and Asian automaker than a Japanese one. The company produced two million vehicles in Canada and the U.S. and one million each in China and Asia.

The stock is off around 30% over the past four years, excluding 12% in dividends. Part of the under-performance is due to the delayed launch of new models.

Honda has replaced its complete range over the last three years, but the process was slowed in part due to the strengthening of the yen in 2015 and 2016 and in part because of an earthquake in Japan in March 2016, which knocked out some of its motorcycle and auto parts production for six months.

For the nine months to December 31st, Honda increased its profits by 24% to ¥703 billion ($6.5 billion), despite a strengthening yen and the earthquake.

With the yen weakening in late 2016 and early 2017 and sales improving, Honda upped its guidance in February to ¥785 billion ($7.5 billion), a 20% increase on its forecast. That is the equivalent to earnings of ¥302 per share, a 50% increase on the 2015-16 per share profit of ¥191.

After a difficult few years, Honda's new line-up, increased production, and the benefits of a weaker yen are now becoming apparent in its results.

The stock has a yield of almost 3% on its twice-yearly dividend, which is equivalent to $0.84 per share. The p/e ratio is under 10. Honda is cheap and provides a good exposure to fast growing emerging markets. Buy.

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