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Is Honda (HMC) a Buy Ahead of Q2 Earnings Report?

Christopher Vargas

Honda Motors HMC is set to report its second quarter results before the opening bell on Friday, November 8. The automobile giant has had a somewhat stagnant year thus far; shares are up only 4.6%, lagging behind the broader automobile market’s 15.5% run.

The company is trying to finish the calendar year off strong with a solid quarterly report that can potentially send shares to a new high. The company is also coming off a strong last 12 weeks as its shares have climbed over 15.3%.

Overview

Honda had a terrific month in the US market in August. It sold almost 174,000 vehicles for a year over year gain of roughly 18%. The performance in August marked the firm’s all-time best monthly sales result in the United States. The increase was driven in part by strong sales of the mainstay Civic and Accord sedans, demonstrating that the two models still have appeal in a market that has largely turned away from sedans.

The car manufacturer also posted solid gains in the Chinese market where it sold just over 124,000 vehicles for a Y/Y 5.9% gain. The impressive performance came despite the macroeconomic headwinds between Washington and Beijing, and was driven by strong demand for the compact CR-V crossover SUV and the Civic sedan. The company’s ability to weather broader geopolitical headwinds was a welcome sight for Honda shareholders.

However, despite a strong month in August, Honda was not able to keep the momentum going in the subsequent month; it reported that US sales fell 14.1% in September. Sales of the Accord and Civic sedans, historically two of Honda's biggest sellers in the United States, were down 19.8% and 10%, respectively. Honda's compact CR-V crossover, its top seller in the United States in recent times, still led the company's portfolio with 25,904 sold in September.

Outlook

At the end of October, Honda Motors reported that it would be merging its auto-parts makers with Hitachi Limited HTHIY to build a major global supplier. The companies announced the merger last week, responding to significant changes in the auto industry. Hitachi will take a 67% stake in the merged auto-parts maker, whose annual revenue is estimated at $15.61 billion, and Honda will take the remaining 33%.

For investors looking to Honda Motor’s upcoming quarterly report, it should be noted that the US sales report has been a mixed bag of results. US sales for Q2 were up 2.4% from the prior year’s second quarter but the gain was driven by a strong August performance which was due to aggressive marketing and sales incentives that were up 16% from a year ago.

Our Q2 consensus estimates call for earnings to decline 14.95% to $0.91 per share and for net sales to drop 0.52% to $34.29 billion. Looking ahead to the automaker’s full fiscal 2020 figures, our estimates project earnings to grow 9.29% to $3.41 per share and for net sales to reach $142.82 billion for a 1.62% jump.

Bottom Line

Honda Motors had a superb August that carried the load for US sales in the quarter, but the jump in incentives that the company undertook in the same month might weigh on the firm’s regional margin. However, for investors feeling bullish about Honda heading into its report, the stock is currently trading at a discounted forward multiple relative to the indsutry.

Honda’s product diversity spreads out the firm’s market exposure, which helps separate it from other automakers. It also pays out a healthy 3.02% dividend that can anchor shareholders in times of turbulence. Honda Motors sits at a Zacks Rank #3 (Hold) with a Style Score of A in Value.

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