Honda Earnings Disappoint

Honda Motor Company (HMC) is expanding its business in Asia, growing its global network to increase efficiency, and introducing new products to satisfy local markets. Further, capacity expansion plans in Asia and a new sales strategy in Japan inspire optimism about Honda’s future prospects.

On October 28, Honda Motor reported results for the second quarter of fiscal 2009. In the reported quarter, EPADR was $0.66, down 40% from the prior-year quarter. Revenue declined 4.9% to $27.3 billion on a year-over-year basis, resulting primarily from currency translation effects.

In the Automobiles segment, revenue decreased 7.9% to $20.96 billion from the same period in 2007, due mainly to the negative impact of currency translation effects and decreased overseas unit sales. In the Motorcycles segment, revenue increased 5.1% to $3.87 billion due mainly to increased sales in Asia and other regions including Brazil, offsetting currency translation effects.

However, rising raw material prices and selling and administrative expenses are likely to dent margins. Moreover, unfavorable currency exchange rates, flat-to-lower sales in its key markets such as North America and increased competition will threaten HMC’s global position. Therefore, we maintain our Hold rating with a six-month target price of $24.

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