A must-know investor's guide to Honda Motor Company (Part 3 of 7)
Look forward, not backward
The chart below is from Honda’s (HMC) recent slide deck. Honda is global, with relative over-reliance on Japan and North America while being under-represented in the slow-growth market of Europe and higher-growth Asia.
Honda anticipates continued growth in Asia, particularly China and Japan, to drive automobile sales in the fiscal year ending March 31, 2015. Digging into Honda’s annual report, we see how Honda is growing rapidly in China. In 2014, it introduced full-model changes in China and introduced two new models. Like other manufacturers, Honda operates in China through affiliates that are equity investments. This is required in China to gain entrance to the market.
Market leaders Toyota (TM), General Motors (GM), and Volkswagen (VOW) have similar investments in China. In 2014, these affiliates sold nearly 750,000 units—up 26% from fiscal 2013. Production in 2013 was recovering from production issues from the tsunami in Japan and the flooding in Thailand. Interestingly, Honda’s wholly owned production in Asia increased only 2% in the fiscal year ending 2014. This leads to the conclusion that sales in Asia are driven by the affiliates in China.
Market share and operating leverage
Here’s where market share matters: operating leverage. In the fiscal year ending March 31, 2014, Honda spent $7 billion on capital expenditures. Honda maintains eight manufacturing facilities globally. If you go from one to two shifts at a plant, you double volume but only have to pay labor and parts, in turn improving manufacturing profitability. The same concept applies to research and development (or R&D). Honda spent $6 billion on R&D in the fiscal year ending 2014, developing technologies for future products. If Honda develops a differentiating technology, it can use the technology on over 4.3 million vehicles, leveraging its technology investments. This should provide Honda higher margins.
Let’s take a look to see if Honda’s market share reflects in its earnings. Read on to the next part of this series to find out more. If you want to make it easy on yourself to get automobile exposure, you can invest in the exchange-traded fund CARZ.
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