Honda: A Shift to Electric

12/19/2018 5:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Honda (HMC) is the third largest automaker in Japan and the eighth largest worldwide. It produced just over 5.3 million cars and light vehicles in 2017-2018, explains Gavin Graham, contributing editor of Internet Wealth Builder.

It is also the world's largest motorcycle manufacturer, producing 21 million motorbikes last financial year, as well as All Terrain Vehicles (ATVs), mowers, and power tools. It recently started manufacturing business jets.

One of the reasons for recommending Honda is its very well diversified international manufacturing base, with two million cars produced in the U.S. and Canada last year, and one million each in China and other Asian countries, as against only one million in Japan and 200,000 in Europe.

Honda has been rapidly developing its hybrid technology, believing that two-thirds of its vehicles will be electrically powered in some form by 2030. In the meantime, Honda offers the Accord, Insight, CRV, and CDX in hybrid form, and the Clarity in hybrid. Full electric and fuel cell versions were launched in North America last year. The Civic, Accord, and CRV have all been relaunched in the last three years.

Its motorcycle business has between 70% and 80% market share in Brazil, Indonesia, Thailand, and Vietnam and a 28% share in India. Motorcycle penetration in Indonesia, Thailand, and Vietnam is between 25% and 40% but is only 8% in India, giving room for substantial growth in the market, even if its market share remains at around 30%.

Honda pays dividends twice a year, which the next one due this month. The last two have been around $0.24 per share, equivalent to a yield of 3.2%. Honda has recovered well from its operational issues over the last couple of years, but this has yet to be reflected in its share price.

Selling at seven times historic and eight times future earnings and yielding over 3%, it is cheap and an excellent play on growing middle class incomes in emerging markets, as well as a good play on electrification of motoring in the developed world. I continue to rate the stock a buy.

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