Get documents about "Investment Rating Buy Hold Pricing Closing Price 29 18 52 Week High 30 36 Honda Motor Company HMC 52 Week Low 23 75 I Investment Highlights
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Honda Financial Corporation document sample
Document Sample
Investment Rating
Buy/Hold
Pricing
Closing Price $29.18
52 Week High $30.36
Honda Motor Company (HMC)
52 Week Low $23.75 I. Investment Highlights
Profitability & Company Profile
Effectiveness (ttm)
ROA 5.03% Honda, based in Tokyo, Japan, was established in 1948
ROE 13.52% by Soichiro Honda. Honda Motor Co., Ltd. engages in
Profit Margin 5.00% the development, production, and manufacture of motor
Operating Margin 7.09% products, ranging from small general-purpose engines
and scooters to specialty sports cars. It is the largest
Market Data
Total Assets (bil) $86.65 manufacturer of motorcycles, and one of the leading auto
Volume 46,200 makers. It also offers all-terrain vehicles, personal
Avg Vol (3m) 539,598 watercraft, robotics products, and aircraft jets. Honda’s
Div & Yield 0.34(1.10%) motorcycle line consists of sports, business, and
Market Cap (bil) $55.55 commuter models. Honda’s core automobile products
EPS (ttm) 2.19 include passenger cars such as: Legend, Accord, Civic,
P/E ((ttm) 13.46 City, Fit Saloon, and Acura brands. The company also
offers many financial services to its customers and
Zach Bodine dealers. In addition, Honda manufactures a wide variety
zdbnp6@mizzou.edu of power products, including power tillers, portable
generators, general purpose engines, grass cutters,
outboard engines, water pumps, snow throwers, power
carriers, power sprayers, lawn mowers and tractors. The
company sells its products internationally through
wholesalers and independent retail dealers. Honda is
currently traded on the NYSE.
While organic growth in a stagnant economy with
growing raw material prices seems like a daunting task
for an established manufacturer, Leggett has proven its
ability to significantly augment business growth through
prudent acquisitions. Since its IPO in 1967, Leggett has
averaged annual growth of 15% with goals of 3%-6%
internal growth and 8%-10% acquisition growth. In
recent history, growth has been significantly less with a
recession followed by a stalled economy in the United
States. With an organic growth rate so closely tied to the
state of the overall economy, short term growth is rather
unpredictable.
Given the company’s performance in the past and current
market share, the long term growth outlook is positive.
II. Executive Summary
Honda Motor Co. is a manufacturer of automobiles that also diversifies itself in to several
other industries. They have a long history of having consistent growth, and have grown to
include 437 subsidiaries and equity method affiliates. In 2005 Honda increased its
revenues at a rate of 6%, while many other automakers struggled. It is one of the few
companies in the automobile industry that is still generating sales domestically, and they
are one of the many that are generating higher sales abroad particularly in the U.S.
With increasing gas prices last year, Honda is one of the few automotive companies that
produced positive results. With excellent research and development capabilities Honda
appears to be a solidified company for the long-term investment.
Investment Recommendation: Buy
Pros:
Fuel/ cost efficient products and technology
Extensive R&D programs
Superior Technology
Moving towards differentiated product lines
One of the few currently profiting companies in its industry
Objective Management Structure
Continuous increase in automotive sales in North America, particularly U.S., and
in Europe as well.
Cons:
Fluctuation of Exchange rates, makes for inconsistent earnings
Japan’s Economy
Automotive industry very susceptible to interest rates
Toyota may be a better buy
Critical Factors
Honda has invested serious time and money into their new Hybrid Civic and Hybrid
Accord, which they have released globally. Since the company receives most of its
current sales from its automobile sector, the success of these vehicles will play a crucial
role in determining Honda’s success in 2006. Additionally they are expanding further
onto China hoping to increase production there 65% by the end of the year. The ability of
Honda in gaining market share in China’s increasingly competitive market, while
maintaining steady earnings and growth in the U.S., will also be a large determining
factor in their long term success.
III. Company Description http://world.honda.com/profile/overview/
Established in 1948, Honda Motor Co., Ltd., has remained competitive by providing
products of the highest quality that create new values, at reasonable prices, for worldwide
customer satisfaction. In addition, the Company has made it a point to create products
that offer environmental protection and enhance safety
Honda’s main focus is in four categories: automobiles, motorcycles, power products, and
financial service. The Company has grown to become the world's largest motorcycle
manufacturer and one of the leading automakers. With a global network of 437*
subsidiaries and equity-method affiliates, Honda develops, manufactures, and markets a
wide variety of products ranging from small general-purpose engines and scooters to
specialty sports cars, to earn the Company an outstanding reputation from customers
worldwide.
Maintaining its commitment to achieving the visions of "Value Creation,"
"Glocalization" and "Commitment for the Future," Honda aims to share joy with its
customers worldwide, thus becoming "a company that society wants to exist." Honda has
also recently been acknowledged globally as a leader among environmentally aware and
sensitive companies, not only for the products it produced but the way it produced them.
V. Economic and Industry Environment
Industries Relation to the Economy
Industry Classification
Honda offers motorcycles, power products, financial services, and automobiles; however,
it would be fair to say that the automotive industry is by far their most classified industry.
HMC Sales Allocation Over the Past 9 Months
3% 4% 12%
Motorcycles
Automobiles
Financial Services
Power Products
81%
Chart Data provided by 9 month sales report ending Dec 31, 2005
Sales for each industry increased from the previous 9 month period in 04’. Motorcycle
sales increased by 17.2 percent, power products increased by nearly 16 percent, financial
services increased by 18.7 percent, and most importantly automobile sales increased by
15.5 percent. Total sales overall increased by 15.9 percent.
Along with most of Honda’s sales coming from automobiles, North America, primarily
the U.S., is where over half of Honda’s total sales are derived from.
HMC Sales Allocation Across Countries (last
reported 9 mo.)
7%
18%
11%
Japan
North America
10%
Europe
Asia
Other Regions
54%
Sales were up in North America by 2.1%, for the nine months reported on 12/31/05,
compared to the nine months reported 12/31/04. Also sales decreased in Japan by 2.6%
over this same time period. All other countries and regions primarily remained
unchanged.
Industry as a Whole
The global automotive industry has lately been sort of backwards. North American
companies such as: GM and Ford are having success in Asia, in particular, China, while
not being able to produce good numbers domestically. Japanese companies like Honda
and Toyota are currently very successful in North America while just getting by at home.
Germans car manufacturers, once notably known for their superior engineering, are
struggling to produce quality products.
General Motors is dealing with massive amounts of health care spending. They are
second only to the U.S. government in that department. GM’s annual cost of providing
health care is more than $100 billion. In fact, $1,500 of every car that GM sells goes to
pay off those health care benefits. GM has gone to the extent of selling large portions of
its GMAC subsidiary which increases its debt, to cutting numerous jobs and closing
plants. Most financial analysts believe that GM has enough cash to be around for only
two or three years, which increases the likelihood of bankruptcy. However, GM is doing
well in the Asian market, most particularly China. Additionally, they are trying to keep
competitors like Honda and Toyota from stealing their market share.
Ford is another company that is witnessing job cuts. Ford lost $1.6 billion in 2005 due to
inadequate car sales. Just recently Ford released a new plan to cut more jobs and close
more plants. They also sold their car rental business known as Hertz in late 2005.
Another part of their plan is to try to get back some of their U.S. market share by copying
Honda’s and Toyota’s strategy of selling Hybrid cars. In the meantime Ford is hoping its
subsidiaries in China will generate some profits for them. Unfortunately, they are trailing
behind a laundry list of competitors which include: GM, Volkswagen, Honda, Toyota,
and even Hyundai.
DaimlerChrysler has recently changed management and the result has been very
productive for Chrysler. Chrysler hopes the new management can turn around their
Mercedes division in Germany. Mercedes, which is normally known for its good quality,
has had relatively slow sales, lost market share, and poor quality. While GM and Ford are
currently downsizing and losing their hair, Chrysler announced in 2006 a plan to increase
North American production capacity up to 43% by the beginning of 2007. Additionally
Chrysler is currently focusing on drawing more attention between themselves and
Mercedes.
Another corporate calamity is Volkswagen. They are suffering from high costs and low
sales volume due to high sticker prices, and low quality. The brand, VW, has been
heading towards a decline in Europe, North America, and at home in Germany as well.
Volkswagen used to have the leading market share in China, but lost that single highnote
to GM. Many of the problems Volkswagen has are similar to GM. Powerful labor forces
continue to plague the company. To be successful VW has to battle German labor unions
to lower wage costs, cut jobs, and eliminate its 30% manufacturing overcapacity.
Toyota and Honda may be the only two companies driving in the right direction. The two
companies are successful in their domestic markets as well as those in Europe and
especially North America. They both are leaders in the development of hybrid technology
which, as fuel prices soar, will almost certainly be a key product strategy as time goes on.
Both Toyota and Honda are joining the China surge in hopes to gain market share. But
they are trailing Ford, GM, and Volkswagen. However, it would be reluctant of me not to
remind you that Honda and Toyota both made late entrances to the U.S. car market, and
they were very profitable. Only time will tell which companies will thrive, just survive,
or take a dive.
IV. Competition
The competition surrounding automobile manufacturers is obviously very intense. The
automobile industry as whole is very closely related to the market. If you look futher on
in this report you will see just how closely Honda follows the market. The reason that the
automobile industry normally follows the market is because of the size of purchase
related to cars. When the economy is doing well, and consumers feel that they have
sufficient funds to spend on a car, the automobile industry as a whole does rather well,
and all companies stand to make a profit. However, in times of a poor economy, or a less
prosperous one, people do not have the funds to make big automobile purchases.
However, companies like Honda, still find a way to fall into the funk that the market
does. This is because they offer cars that are fuel and cost efficient, as opposed to the
huge product lines of trucks and SUVs that ford and GM have. Since the rise of gas
prices, only Toyota and Honda have been able to continuously have profits. The idea of
American made does not carry the name and quality it used to in the U.S. American made
now means expensive, high after purchase costs related to fuel, and poor to medium
quality. Whereas companies like Honda, who are committed to fuel and cost efficiency,
are taking over a large chunk of Ford and GM’s market share particularly in U.S. Now,
when the economy becomes more prosperous or gas prices rise, I would expect Ford and
GM to do better, but everyone in the car industry does better when the economy is better.
This is why Honda has the edge. Toyota can be another arguable claim as well.
The following Chart shows that Honda is leading in quarterly revenue growth and gross
margin. They are second to Toyota in many of the categoriesincludin: Operational
margin, net income, earnings per share, and price earnings.
Competitive Analysis
DIRECT COMPETITOR COMPARISON
HMC F GM TM Industry
Market Cap: 53.25B 14.06B 10.86B 171.94B 53.25B
Employees: 137,827 300,000 327,000 265,753 300.00K
Qtrly Rev Growth
(yoy): 15.80% 3.60% -1.20% 14.80% 5.60%
Revenue (ttm): 81.00B 177.09B 192.60B 173.35B 177.09B
Gross Margin (ttm): 29.58% 8.21% 1.53% 18.27% 18.27%
EBITDA (ttm): 8.64B 16.10B 5.82B 24.35B 16.10B
Oper Margins (ttm): 7.09% 1.00% -5.34% 8.30% 7.89%
Net Income (ttm): 4.05B 2.23B -8.45B 10.82B 3.37B
EPS (ttm): 2.19 1.048 -15.14 6.61 2.19
P/E (ttm): 13.22 7.22 N/A 15.99 15.99
PEG (5 yr expected): 2.06 2.07 N/A 2.9 2.07
P/S (ttm): 0.67 0.08 0.06 1 0.66
F = Ford Motor Co.
GM = General Motors
Corporation
TM = Toyota Motor Corp.
Industry = Auto
Manufacturers - Major
Industry Leader By Sales
1. General Motors Corporation (GM)
2. DaimlerChrysler AG (DCX)
3. Toyota Motor Corporation (TM)
4. Ford Motor Company (F)
5. Volkswagen AG
6. Nissan Motor Co., Ltd. (NSANY)
7. Honda Motor Co., Ltd. (HMC)
8. PSA Peugeot Citroën S.A. (PEUGY.PK)
9. Fiat S.p.A. (FIA)
10. Renault S.
VI. Company Position
Market Information
Marketing Fundamentals
Honda’s latest marketing ploy is to make consumers aware of their ACE (Advanced
Compatibility Engineering) system. This is an automobile body structure that helps
increase vehicle compatibility as well as spread the energy of a collision throughout the
car instead of one concentrated area. The ACE system is the standard for the all new
Civics. Additionally, Honda is making the public aware that they have more 5 star safety
ratings than any other brand as conducted by the NHTSA. They are the first to display
their safety rating on all automobile window stickers.
Technology
Honda prides itself on its technology research so much, that it’s difficult to focus on just
one area. There most popular technology can be seen through the new Honda Civic
Hybrid, or the Hybrid Accord. Both of these automobile contain a fuel efficient engines
that contain a battery that takes care of the extra horse power your fuel tank usually
provides. They continue to do much research on fuel cell technology after releasing the
FCX. They are also the leaders in Robot technology. In 2002 they released the ASIMO
Robot, which was the first humanoid robot to contain artificial intelligence. The ASIMO
responds to body language and gestures, and can turn and twist just like a real person. It
can also jog at a speed of 6 km/h.. Additionally, in 2004, Honda formed a strategic
alliance with GE, the world’s leading jet engine manufacturer, in producing jet engines.
And with air travel becoming more and more popular since 911, this could lead to a
significant profit.
Product Development, R&D
Honda currently has individualized R&D facilities in Japan for motorcycles, automobiles,
and power products, and a motorcycle R&D center in China for its increasing market
demand. HRI (the Honda Research Institute) is located in Japan, U.S., and Germany. At
HRI there is continuous research being done in robotics technology, automotive safety,
ultra lightweight safety, and fuel cell technology. They are also currently working on
deriving automotive fuel from plants. Along with all of these research centers, Honda
also has networked facilities in the UK, Germany and Italy to help focus on the European
market more independently.
Production
Honda is expected to boost its manufacturing capacity in China by 65% this year to
530,000 vehicles a year. They are trying to offer a fuller lineup of products in China that
includes minivans. So far they have stayed clear of marketing big sport-utility vehicles
or pickup trucks in China. Donfeng Honda Automobile Co. in China is where one of the
factories is being built. The new factory will increase production capacity from 30,000
Honda CRV per year to an additional 90,000 Civic sedans. The project will cost around
$350 million, and should be up and running this spring. Additionally, Honda is expected
to spend $275 million to add a second line to a plant it operates jointly with Guangzhou
Automobile Group in Guangzhou. The second line is not expected to start production
until later in the year. This plant will also have its production capacity boosted to 120,000
automobiles per year. It is unknown at this point what new automobiles will be
manufactured in Guangzhou, although they are currently manufacturing Accords and
Odyssey minivans.
Image
Honda is relentless in portraying themselves as a company that cares for the environment
and the safety of all mankind. In a time when security, protection and health is treasured
more than ever, Honda is a company that meets the standard. To ensure their image as
company dedicated to what they believe in, Honda recently invested in a food that offers
many health benefits. Honda Trading Co., an extension of Honda, has just announced it
will begin marketing in March the ''Nattokinase'' enzyme produced by the bacteria
''bacillus natto''. The significance of the enzyme is that it helps prevent blood clotting.
Blood clotting is common among Japanese people, because it can easily be contracted
from the digestion of soy beans. By including the Natto enzyme in the boiling process of
the soybeans it will dramatically decrease blood clotting. Honda also is planning on
releasing the Natto enzyme in the U.S. as well. Japan estimates that there is a $130
million dollar market for this product in Japan alone. It is sold under the label Pure
Products.
Legal
The New Jersey Supreme Court issued a verdict today that reinstated a case in which
Honda was involved. Honda was initially sued in 1999 for having a Honda Passport
suffer engine failure which was leased by a Mr. Christopher Ryan. The 1975 Magnusen-
Moss Warranty Act, up until Monday, protected those who buy consumer products, and
not those who lease them. Ryan had engine failure 22,000 miles after the lease.
According to the MMWA leases are only covered up to 18,000 miles on all motor
vehicles. However, this decision was overturned on Monday by the New Jersey Supreme
Court. The Court felt that all consumers, whether buying or leasing, should receive the
benefit of the manufacturer’s warranty. In this case Honda’s warranty covers the vehicle
up to its first 30,000 miles. The new law like the MMWA pertains to all consumer
products, however, speculators believe that only cases related to motor vehicles, and
water crafts will be opened. Additionally the MMWA forces the manufacturer whom
leases the defective product to cover the consumer’s legal fees. About one quarter of all
vehicles in the U.S. are financed via leases. In a response to the court ruling, the Alliance
of Automobile Manufacturers has released a friend-of-the-court brief in defense of
Honda’s position stating that Congress never meant to protect leased vehicles when it
passed the law three decades ago. The AAM includes other major auto-manufacturers
such as: Chrysler, Ford, GM, Toyota, Volkswagen, Mitsubishi, Mazda, and Porsche.
Management Quality
Honda is also working to improve corporate governance. This is one of its most
important management issues. Their goal is to ensure that Honda is a company who is
appreciated by shareholders, customers and society.
Each regional operation carries out its specific business so they can quickly and
efficiently respond to customer needs, and each business operation is responsible for its
own specific products. The result is that the entire organization functions effectively and
efficiently.
The responsibility of the Audit Office is to carry out complete, effective audits of the
performance of each division’s business. Each division aims to enhance compliance and
risk management, while advancing its own self-reliance.
To ensure objective control of the Company’s management, outside directors and
corporate auditors are appointed to the Board of Directors and the Board of Corporate
Auditors, which are responsible for the supervision and auditing of the Company. The
term of office of each outside director is limited to one year, and the amount of
remuneration payable to them is determined according to a standard that reflects their
contributions to the Company. Our goal is to maximize flexibility in response to changes
in the operating environment.
For shareholders and investors, Honda’s policy ensures disclosure of financial results on
a quarterly basis in a timely and accurate basis, as well as disclosure of its management
strategies. They hope to remain committed to these disclosures in the future.
Directors
Mr. Takeo Fukui, 62
He is the Chief Executive Officer, President and Representative Director
Mr. Satoshi Aoki, 60
Chief Financial Officer, Compliance officer, Executive Vice-President, Head of United
States Operations, Chief operating officer of business management operations and
Representative Director.
Mr. Akio Hamada, 58
Director, President of Honda Engineering Co. Ltd,
Mr. Koki Hirashima, 60
Chief operating officer of for production operations, Director of Risk Management
Operations, General Supervisor for Information Systems, President of Honda of America
Manufacturing.
Mr. Kazuto Iayama, 55
Director and President of UK Honda Manufacturing Ltd, Executive Vice-President of
Honda Motor Europe Ltd,
VII. Financial Statement Analysis
Financial Ratios
Trend Analysis (HMC vs. S&P500)
You can see by looking at this graph that Honda’s stock price percentage follows the
market trend very closely. This is similar with the automobile industry in general. Honda
and Toyota both follow the market trend rather closely. Because the automotive industry
is a $317 billion dollar industry, it will obviously have a large affect on the overall
market.
Looking at the five year analysis, you can continue to see how honda’s stock price
percentage continues to move parallel with the S&P. In fact, Honda has managed to stay
above the market at a steady pace. This is largely due to their increasing market share
which has been accumulating in the U.S. which could be linked increasing gas prices.
Their Hybrid technology has given them the first mover advantage in car sales since the
increase of gas prices as well as their many other profitable sectors.
Honda’s revenues have increased at an annual rate of 7.2% over the past five years. There
dividend per share has increased by 19.42% over that same time span. There earnings per
share have increased by 14.1 percent, and there operating income has increased 8.2 %
Additionally they have a quick ratio of 0.84, and a current ratio of 1.13. There total debt
to equity of 0.839, shows that they are good at manging there funds. The return on equity
per share is equal to 13.52%, and there return on assets is equal to 5.03%.
Income Statement
PERIOD ENDING 31-Mar-05 31-Mar-04 31-Mar-03
Total Revenue 80,445,977 75,912,180 66,163,442
Cost of Revenue 56,155,000 52,171,196 44,904,594
Gross Profit 24,290,977 23,740,984 21,258,848
Operating Expenses
Research Development 4,350,112 4,175,393 3,625,963
Selling General and 14,073,309 13,984,252 11,910,459
Administrative
Operating Income or Loss
5,867,556 5,581,339 5,722,427
Income from Continuing Operations
Total Other Income/Expenses 1,555,834 483,386 -560,142
Net
Earnings Before Interest And 6,530,060 6,064,725 5,162,285
Taxes
Interest Expense 421,774 94,804 101,318
Income Before Tax 6,108,287 5,969,921 5,060,967
Income Tax Expense 2,479,985 2,350,482 2,034,040
Net Income From Continuing 4,521,632 4,318,343 3,026,927
Ops
Extraordinary Items - - 514,368
Net Income 4,521,632 4,318,343 3,541,295
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares 4,521,632 4,318,343 3,541,295
Balance Sheet
31-Mar-05 31-Mar-04 31-Mar-03
Assets
Current Assets
Cash And Cash
Equivalents 7,193,903 6,737,115 4,543,453
Net Receivables 18,845,241 17,300,000 14,478,645
Inventory 8,020,041 7,118,527 6,241,434
Other Current Assets 3,222,115 2,819,621 2,063,056
Total Current Assets 37,281,301 33,975,262 27,326,588
Long Term Investments 30,118,041 27,141,157 21,936,825
Property Plant and Equipment 14,733,544 13,350,438 11,573,047
Goodwill - 144,764 129,198
Accumulated Amortization - - -
Other Assets 4,514,936 2,845,921 2,789,057
Total Assets 86,647,821 77,457,542 63,754,715
Liabilities
Current Liabilities
Accounts Payable 18,530,455 16,332,325 13,880,439
Short/Current Long
Term Debt 12,131,097 11,358,983 9,813,057
Other Current
Liabilities 4,200,094 3,322,509 2,222,342
Total Current Liabilities 34,861,645 31,013,817 25,915,837
Long Term Debt 14,503,350 12,969,892 9,463,511
Other Liabilities 6,692,392 5,778,053 6,548,692
Deferred Long Term Liability Charges - 413,441 -
Minority Interest - 550,421 -
Total Liabilities 56,057,387 50,725,622 41,928,039
Common Stock 800,423 800,423 714,356
Retained Earnings 35,427,262 33,381,736 26,241,811
Treasury Stock -180,801 -1,410,485 -471,158
Capital Surplus 1,604,538 1,606,287 1,431,991
Other Stockholder Equity -7,060,988 -7,646,042 -6,090,324
Total Stockholder Equity 30,590,434 26,731,920 21,826,676
Net Tangible Assets $30,590,434 $26,587,156 $21,697,478
Cash Flow Statement
PERIOD ENDING 31-Mar-05 31-Mar-04 31-Mar-03
Net Income 4,521,632 4,318,343 3,541,295
Operating Activities, Cash Flows Provided By or Used In
Depreciation 2,099,494 1,985,039 1,833,254
Adjustments To Net Income 89,912 3,980 687,414
Changes In Accounts Receivables -652,349 473,603 -139,789
Changes In Liabilities 2,058,183 2,080,615 1,754,404
Changes In Inventories -739,192 -482,075 -1,216,564
Changes In Other Operating Activities -434,078 -1,749,144 -748,560
Total Cash Flow From Operating
Activities 6,943,603 6,630,361 5,711,454
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures -3,478,014 -2,675,991 -2,631,025
Investments -4,167,228 -6,499,314 -6,415,950
Other Cashflows from Investing Activities 132,209 178,160 136,435
Total Cash Flows From Investing
Activities -7,513,033 -8,997,146 -8,910,540
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid -444,512 -311,931 -250,461
Sale Purchase of Stock -782,567 -886,402 -470,751
Net Borrowings 2,133,783 5,472,353 3,600,822
Other Cash Flows from Financing
Activities - - -
Total Cash Flows From Financing
Activities 906,704 4,274,020 2,879,610
Effect Of Exchange Rate Changes 119,514 -260,977 -195,432
Change In Cash and Cash Equivalents $456,788 $1,646,258 ($514,907)
Financial Forecasts (from analysts)
HMC Honda Motor Co., Ltd. (NYSE) 29.38 -0.83 ( -2.75%) 4:00 PM ET 2/28/06
Analyst
Broker Recs
STRONG
Avg. Recommend.
BUY
Number of Ratings 3
FY Report Date 3/2006
Av. Target Price $33.32
Current 1 Mo. Ago 3 Mo. Ago
Strong Buy 2 2 2 Current Qtrs. Est. $1.10
Moderate Current Yrs. Est. $2.85
1 1 1
Buy
Hold 0 0 0 PE on CY Est. 12.19
Moderate Next Fisc. Yrs. Est. $2.85
0 0 0
Hold
PE on Next FY 10.32
Sell 0 0 0
Last Qtrs Earnings $0.61
STRONG STRONG STRONG
Mean
BUY BUY BUY
Year-Ago Earnings $2.41
View Competitive Analysis for #’s
RECOMMENDATION SUMMARY*
Mean Recommendation (this week): 1.3
Mean Recommendation (last week): 1.3
Change: 0.0
Industry Mean:
Sector Mean:
S&P 500 Mean: 2.46
* (Strong Buy) 1.0 - 5.0 (Strong Sell)
Two of the three analysts on Yahoo recommend Honda as a strong buy. Although they
have a low dividend yield, they are have been continually risk less in the past. You may
not get the greatest return, gut I can almost guarantee that it will be positive, unless there
is some sort of catastrophic event. Compared to the rest of the market, they continue to
have steady growth and outperform the S&P at a parallel rate. They also show very high
ROE and ROA which contributes greatly to their profitability, and they have the second
highest 5 yr growth rate behind only Toyota. Additionally their expected earnings are
projected to increase by 18%. According to the yahoo analysts their stock price is
expected to grow from 30.36 to 33.32 by years end. This is an increase in stock price of
9.7%. Most analysts project a 5 year growth rate of 5%. This is the same growth rate that
has been assessed to Toyota.
Analysis of Risk
Honda Motor Co. is traded on the NYSE with the ticker symbol “HMC”. The average
trading volume for Honda over the past 3 months is 536,341. The share price had a 52
week low of $23.75 and high of $30.36. (finance.yahoo.com) The current Beta of Honda
is measured at 0.46.(smartmoney.com)
Fundamental Valuation
Estimation of Required Rate of Return
The Required rate of return involves data that has been gathered over the past ten years.
The general idea is that what ever has happened in the past has an influence of what will
happen in the future. I will be using the risk free rate as stated in the Wall Street Journal,
and the average market risk over the past 10 years. Combined with this I will be Using
the Beta from (smart money.com)
Re = Rf + B(Equity Risk Premium)
Re = .0486+.46(.11-.0486) = 7.68%
In Valuing Honda I will be using the Warren Buffet Model as named by my peers.
In estimating the intrinsic value of the company based on future cash flows
I came up with the following numbers
Normal Growth
Re= 7.68%
Owner earnings= $3.14B
Growth rate = 4%
Second Stage Growth rate = 2.5%
Estimated Intrinsic Value= $39.11
Diminishing Growth
Using revenue growth of 14.3% from 2003-2004, and 6% from 2004-2005, you could
project that revenue growth from 2006-2005 could be equal to:
6/14.3=.4196
.4196*6= 2.52% (new assumed growth rate)
Leaving all other variables the same
Estimated Intrinsic Value = $34.84
Impressive growth
By Viewing the table which displays sales in yen over the the 9 months ended
12/31/2004, and then looking at the sales in yen for the 9 months ended 12/31/2005 you
get the following numbers
2004 sales = 6300551
2005 sales =7074255
Growth rate= 7074255/6300551= 12.2%
Adjusted to 10%
Estimated Intrinsic Value = $62.50
Other Considerations
Top Institutional Holders
DODGE & COX INC 23,262,000 1.25 $660,640,800 30-Sep-05
MORGAN STANLEY 9,854,136 .53 $279,857,462 30-Sep-05
SOUND SHORE MANAGEMENT, INC. 5,741,034 .31 $166,317,754 31-Dec-05
LORD ABBETT & CO 2,700,290 .15 $76,688,236 30-Sep-05
AXA 1,461,296 .08 $41,500,806 30-Sep-05
FIFTH THIRD BANCORP 1,410,938 .08 $40,070,639 30-Sep-05
GREENHAVEN ASSOCIATES, INC. 1,349,200 .07 $38,317,280 30-Sep-05
SCHNEIDER CAPITAL MANAGEMENT, L.P. 1,280,475 .07 $36,365,490 30-Sep-05
WELLS FARGO & COMPANY 1,151,605 .06 $32,705,582 30-Sep-05
JP MORGAN CHASE & COMPANY 1,098,868 .06 $31,207,851 30-Sep-05
Leaders in Quarterly Revenue Growth (YoY)
HONDA MOTOR CO ADR [HMC] 15.80%
TOYOTA MTR CP ADS [TM] 14.80%
FORD MOTOR CO [F] 5.10%
GEN MOTORS [GM] -1.20%
Conclusion
Honda has been very consistent over the past five years. They are a company that doesn’t
look down the road 1 yr or 5 years or even 10 years, but 20 years. They continually do
research and development on what they will be the next emerging market. Not only are
they pretty good at predicting what that market is, but it appears as though they are the
first ones to research it. Assuming gas prices will remain where they are now or even rise
Honda’s high quality fuel efficient automobiles should continue to sell in worldwide and
more specifically in the U.S. gaining market share over Ford and GM. Honda’s
commitment to offer safer more environmental friendly products in an ever increasingly
health and safety crazed society should secure them strong potential growth in the
market. If we are going to choose to purchase a stock, you can’t consider Ford or GM as
a choice. However, you could create an argument with Toyota, since they lead in more
categories than any other company. However, Toyota’s stock is selling at more than $100
a share, compared to Honda which is around $30. Additionally Honda has jumped
forward into China’s automotive market establishing bigger production capacity plants.
Honda continues to diversify its company with power products, motorcycles, financial
assistance, as well as jet engines, robotics, and food health research. Hopefully we can
assume that the lawsuit against Honda is minor. Financial analysts believe currently that
it’s a strong buy.
Recommendation
My recommendation is to buy or hold. Compared to the rest of the market there is still
significant room for growth. Honda is a company that is committed to the long term more
than the short term. According the valuation their stock price is currently undervalued.
By purchasing or holding stock in Honda we almost guarantee to have a stock that moves
with the market, so there should be no surprises.
.
Finance Resources
Online
finance.yahoo.com
smartmoney.com
http://world.honda.com/
http://automobiles.honda.com/
http://www.forbes.com/
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