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The car market is in a state of flux right now. The conversion of the combustion engine market to a strong electric vehicle presence is potentially changing a lot of things, and that could mean that many The positions of different players in the market may contract or grow as they make investments in the future of the industry.
Today I want to talk about Honda Motor Co. (New York Stock Exchange:HMC), one of the leading Japanese manufacturers of automobiles and motorcycles. The company has been appearing on many stock screens and we are going to take a look at its recent earnings, its value compared to the sector median and how it looks in terms of profitability for investors.
Although Honda is in many ways more identified with motorcycles than anything else, the company's automobile division It is actually its largest reportable segment, accounting for 66% of total revenue last year.
SEC 10-K
As can be seen, Honda's automotive division is a global business, with very important segments in Japan and North America. The company's relatively small presence in Europe, as well as in growing markets such as Latin America and the Middle East, may offer potential opportunities to increase its market share in the future.
In addition to cars and motorcycles, the company also has a valuable financial services division, which offers services to both customers and dealers. This is not unusual for large car manufacturers and I only mention it to support a full understanding of how Honda is structured.
Balance Sheets – Honda Discount
|
Cash and cash equivalents |
$34.1 billion |
|
Total current assets |
$84.6 billion |
|
Total assets |
$215.6 billion |
|
Total current liabilities |
$61.7 billion |
|
Total liabilities |
121.3 billion dollars |
|
Total shareholders' equity |
$94.3 billion |
(Source: SEC quarterly 6-K filing)
Honda has a very good amount of cash on hand, especially for a company of its size. However, what I find really attractive is that the company is trading at a price/book ratio of 0.63, which is drastically lower than the industry median, which is currently 2.22. This below-median level is interesting, and any book value of a profitable company below 1 is something that makes me want to know more about it, as it is a potential discount.
The risks
As mentioned above, the automotive industry is going through major changes right now, and while Honda is trying to keep up, there is no guarantee that it will be successful in doing so.
As a global company, Honda is also potentially sensitive to geopolitical changes. If wars or regional economic insecurity break out, it could shift priorities from vehicle purchases to other things, and that could hurt the company's sales.
Supplies and raw material prices are also a potential factor. Any sudden increase in material costs could force them to try to pass on higher prices to customers, and that's always risky.
Honda's efficiency depends on its partners and joint ventures. Delays by these partners or poor decisions could, through no fault of Honda's, cause problems for them and cost them efficiency gains.
Finally, new car purchases are always somewhat discretionary. If the global economy experiences a downward trend, Honda, like all major industrial players, could see its sales affected.
Income Statement – Earnings
|
2022 |
2023 |
2024 |
2025 (1st quarter) |
|
|
Sales revenue |
100 billion dollars |
116 billion dollars |
140 billion dollars |
37 billion dollars |
|
Operating profit |
$6 billion |
$5.4 billion |
$9.5 billion |
3.3 billion dollars |
|
Net profit |
$5.2 billion |
$4.9 billion |
$8.1 billion |
2.8 billion dollars |
|
Diluted EPS |
$2.82 |
$2.64 |
$4.68 |
$1.68 |
(Source: Latest SEC Quarterly Report 20-F and 6-K)
Honda has seen some recent growth over the past few years. However, what is particularly impressive is the earnings per share growth, which gives us a price-to-earnings ratio of 6.80, which is cheap by any reasonable measure. Again, when compared to the industry median of around 18, Honda starts to look like a real bargain.
The trend is expected to continue in the future, with 2025 revenues expected at $146.7 billion and earnings per share of $4.52. That gives a forward P/E of 7.04, still quite cheap compared to the rest of the sector. Revenues of $147.8 billion and earnings per share of $4.49 are expected for 2026.
Honda fits right into the range of stock values. Between a low book value and a low price-to-earnings ratio, this is pretty much what I generally look for in a company.
Dividends: good but inconsistent
Honda, a great cash generator, has been returning value to investors in the form of dividends. In recent years, those dividends have been very good, yielding over 4%. However, dividends are not set in stone, which means that as investors, we need to be confident that the return will be inconsistent.
As long as Honda continues to post good results, I expect dividends to remain fairly high, although it is understandable that the transition to more electric vehicles may force them to again allocate some of their capital to a technology change. The dividend is very good for what it is, but it should not be relied upon, at least not at the current level.
Conclusion
While I am a bit cautious on the automotive industry in general due to changing times, I feel that Honda, despite trading in the middle of its 52-week range, is a bargain for the profitable company that I would be investing in. I am going to rate it as a buy, and the only reason it is not a strong buy is because of the uncertainty around electric vehicles.
Honda is a great company in a great sector and its profitability makes it a very suitable choice for most portfolios. Going forward, I will be keeping a close eye on its ongoing earnings and if they meet expectations in the coming quarters, there is nothing not to like.