Must-know: Why Honda is unusual among major auto makers

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A must-know investor's guide to Honda Motor Company (Part 5 of 7)

(Continued from Part 4)

Motorcycles and engines

Of the major auto makers, Honda is unusual in that it has significant non-automotive operations.

The above chart represents Honda’s revenue breakdown in the fiscal year ended March 31, 2014. Honda’s revenue is 77% automobile, but 14% of its revenue comes from motorcycles, 6% from financial services, and 3% from power products and other. Granted, Honda’s heritage is rooted in engines on bicycles, but why would Honda pursue this market segment? Moreover, why bother with the small engines it produces? Amazingly, the millions of engines Honda produces each year only account for 3% of the company’s revenue. Let’s look at Honda’s operating income to find out why.

Where’s Honda making its money?

The chart above represents the portion of total operating income from Honda’s operating segments in the fiscal year ended March 31, 2014. Operating income is revenue less expenses before interest and taxes. Automobiles, which represent 77% of revenue, generated only 54% of total Honda operating income. I calculate that automobiles generate a 4% operating profit margin. Motorcycles, which represent 14% of revenue, generated 24% of operating income. I calculate a 10% operating margin on this business. Financial services support both businesses and have a high operating profit margin of 26%. Power products lost a bit of money in 2014.

So why would Honda keep engines and pursue automobiles? My take on this is that Honda views itself as an innovative company and the separate businesses support the company’s innovation.

How does Honda compare?

The chart above reflects the operating income of market leaders Toyota (TM), General Motors (GM), Volkswagen (VOW), and BMW Group (BMW). Looking at the group of bars to the right, which reflect the trailing 12 months, we see Honda comparing well against GM, about equal with Volkswagen, and below Toyota and BMW. BMW sells a premium product at premium prices, driving higher margins. BMW’s business model relies on the greater margins to support the R&D (research and development) budget in order to produce premium vehicles. Toyota has scale to support its business model. Considering Volkswagen is among the top three and Honda’s operating margin is about equal, I’d say Honda is performing reasonably well. If you wanted to invest in the segment through an exchange-traded fund, you could buy CARZ.

Continue to Part 6

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