Honda Ups Profits, Lowers Guidance

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Honda Motor Co. (HMC) reported a 36.1% rise in profits to ¥82.23 billion ($1.06 billion) or ¥45.63 (59 cents) per share in the second quarter of its fiscal 2013 from ¥60.43 billion or ¥33.53 per share in the year-ago quarter. However, earning per share in the quarter lagged the Zacks Consensus Estimate by 33 cents.

Consolidated net sales and other operating revenues in the quarter appreciated 20.4% to ¥2.27 trillion ($29.27 billion) driven by higher revenues from the company’s Automobile segment with the recovery from the impact of twin disaster in Japan in 2011, offset partially by unfavorable foreign currency translation effects.

Consolidated operating profit jumped 92.1% to ¥100.87 billion ($1.30 billion) from ¥52.51 billion a year ago. The increase was attributable to higher sales volume, favorable model mix and positive impact from cost reduction measures, offset partially by increased selling, general and administrative (SG&A) and research and development (R&D) expenses, and unfavorable foreign currency effects.

Segment Results

Revenues in the Automobile segment rose 32.5% to ¥1.77 trillion ($22.76 billion) on a 42.9% increase in unit sales to 816 thousand, despite unfavorable currency effects. Operating income was ¥37.14 billion ($478.57 million) in sharp contrast to an operating loss of ¥29.14 billion a year ago due to higher sales volume, favorable model mix and positive impact from cost reduction measures, offset partially by increased SG&A expenses and R&D expenses, and unfavorable foreign currency effects.

Revenues in the Motorcycle segment dipped 13.3% to ¥309.71 billion ($3.99 billion) due to unfavorable currency despite higher unit sales. Operating income fell 34.8% to ¥25.40 billion ($327.32 million) from ¥38.93 billion in the same period last year due to lower sales of exported parts for production from Japan and unfavorable foreign currency effects, offset partially by lower SG&A expenses.

Revenues in the Financial Services segment edged up 3.1% to ¥130.40 billion ($1.68 billion) in the quarter. However, operating income went down 10.6% to ¥38.28 billion ($493.26 million) from ¥42.83 billion a year ago due to gross residual losses on leased vehicles.

Revenues in the Power Product and Other slipped 5.9% to ¥64.96 billion ($837.10 million) due to lower revenues in other businesses and unfavorable foreign currency translation effects, despite an increase in unit sales. The segment had a meager operating profit of ¥53.00 million ($683 thousand) compared with an operating loss of ¥114.00 million a year ago due to an increase in sales volume and favorable model mix, despite increased SG&A expenses and unfavorable foreign currency translation effects.

Financial Position

Honda had consolidated cash and cash equivalents of ¥981.31 billion ($12.65 billion) as of September 30, 2012, compared with ¥1.25 trillion as of March 31, 2012. Total debt amounted to ¥4.01 trillion ($51.71 billion) as of September 30, 2012, translating into a debt-to-capitalization ratio of 47.7%, compared with ¥4.11 trillion and a debt-to-capitalization ratio of 48.3% as of March 31, 2012.

In the six months of fiscal 2013, Honda’s cash flow from operations fell to ¥309.81 billion ($3.99 billion) from ¥493.64 billion in the year-ago period, despite a rise in profits. The decline was attributable to increases in trade accounts and notes receivable and inventories as well as a decrease in trade accounts and notes payable. Meanwhile, capital expenditures increased to ¥282.33 billion ($3.64 billion) from ¥148.10 billion in the first half of fiscal 2011.

Lower Guidance

Honda downgraded its revenue and earnings guidance for fiscal 2013 due to a negative impact from increased SG&A expenses and R&D expenses, and unfavorable currency translation effect.

The company has projected revenues to improve 23.3% ¥9.80 trillion, operating profits to rise 124.8% to ¥520 billion, net profit to go up 77.3% to ¥375 billion and earnings per share of ¥208.07 for the year. This compared with the prior outlook of a 29.6% increase in revenues to ¥10.30 trillion, 168% rise in operating profits to ¥620 billion, 122.2% increase in net profit to ¥470 billion and earnings per share of ¥260.78 for the year.

Our Take

Honda is a leading manufacturer of automobiles and the largest manufacturer of motorcycles in the world. It is the second largest automaker in Japan following Toyota Motor Corp. (TM).

The company is recognized internationally for its expertise and leadership in developing and manufacturing a wide variety of products that incorporate its efficient internal combustion engine technologies ranging from small general-purpose engines to specialty sports cars. Currently, it retains a Zacks #3 Rank, which translates to a short-term (1 to 3 months) rating of Hold and we have reiterated our long-term (more than 6 months) recommendation of Neutral on the stock.

(Exchange Rate: $1= ¥77.60)
 

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