The must-know drivers behind Honda’s earnings and dividends

William Lowry, CFA

A must-know investor's guide to Honda Motor Company (Part 4 of 7)

(Continued from Part 3)

Working through the deck

The slide below is from Honda (HMC) management’s deck reviewing the performance of the fiscal year ending March 31, 2014.

As you can see from the chart above, revenue increased in yen terms 19.9%. However, the majority of this increase was due to the devaluation of the yen in the year. Management points this out under “Excluding currency translation effects” above. Excluding the devaluation, revenue would have increased 4.6%. driven by a 3.9% increase in the Automobile segment. This is a big swing. Let’s take a moment to see how this works.

Currency matters

The chart above presents the value of the Japanese yen versus the U.S. dollar and the euro. From March 31, 2013, to March 31, 2014, the yen depreciated against both currencies, from 99 to 103 for the the U.S. dollar and 128 to 142 against the euro. The range over that period is important too, as the peak and the trough over time were 98 to 105 versus the dollar. This is a 7% difference. Against the yen, it varied from 128 to 145—or a 13% difference. The net income margin for the industry is approximately 7%, so a 7% change or a 13% change in the currencies has a significant impact. The impact of the U.S dollar is greater, as 47% of Honda’s sales are in North America.

Earnings impact

The following slide is from Honda’s fourth quarter presentation.

Admittedly, it’s a busy slide. So let’s walk through the top three drivers of the change in income before income tax from 488 billion yen to 729 billion yen. The most significant driver of the earnings increase was the impact from the depreciation of the yen in the 12-month period. The second most significant impact on the increase was the rise in selling, general, and administrative expenses (SG&A), which increased due to a rise in marketing and an insurance gain reversal from a prior year. The third most significant impact was unrealized gains and losses, which relate to managing Honda’s currency exposure. The third most significant driver of the earnings increase was from Honda’s rise in sales volume and model mix. Any good manufacturer will continually seek to optimize designs and work flows to maximize earnings.

I think it’s interesting to reflect on the impact of the non-automotive units to Honda. For all the media releases and attention-grabbing photos of robots, airplanes, and emerging technologies, earnings remains driven by managing currency exposures and selling automobiles around the world. The same is true for Honda’s competitors, Toyota (TM), General Motors (GM), and Volkswagen (VOW). You could invest in these companies by purchasing the exchange-traded fund CARZ.

Continue to Part 5

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