Honda’s brand and reputation for quality drive demand for its vehicles

Business Strategy & Outlook

Honda’s products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market’s move to light trucks, where Honda’s lineup is not as complete as competitors, may be permanent. Ongoing risks include foreign-exchange volatility, a highly competitive U.S. market, and rising steel prices. Honda’s brand and reputation for quality drive demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to just 22% in 2021. In 2021, cars made up 37% of Honda’s U.S. sales mix, compared with 31% for Toyota, 7% for General Motors, and 4% for Ford. Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil, the Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. One had liked to see Honda attain a more complete vehicle lineup. The company instead seems to be focusing on efficiency by targeting a two thirds reduction of vehicle trim and option choices across its five global models, such as Civic and Accord, by 2025 versus 2018 levels. As of April 2022, it has achieved an over 50% reduction.

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices and inflation making input costs expensive while hurting consumers’ purchasing power. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. A weak dollar relative to the yen can also hurt profits. Honda does a good job producing where it sells to mitigate exchange risk. In 2020, Honda announced it will buy EV batteries from GM’s Ultium battery line, and in April 2021 new CEO Mibe said Honda targets a 100% global zero emission (electric and hydrogen fuel cell) vehicle lineup by 2040. Honda is planning to move beyond hybrids.

Financial Strengths

Honda’s financial position is excellent, as the company has a small debt load. The Honda’s cash and available credit lines at March 31, 2022, to be about JPY 7.5 trillion. This flexibility is important because it gives the company plenty of room to acquire more capital in the debt markets if needed. Excluding the captive finance company, Honda held about JPY 3.3 trillion in cash at the end of fiscal 2022. They calculate a net cash position at year-end fiscal 2022, excluding the captive finance arm, of nearly JPY 2.5 trillion. As of year-end fiscal 2022, the consolidated company has JPY 3.8 trillion of unused credit lines. Its debt/EBITDA ratio excluding the financing arm is generally well below 1 but was 1.3 in fiscal 2012 due to the Japan earthquake and Thai flooding. One can not see Honda having any problems meeting debt maturities, and they expect the company even before financial services results to be free cash flow positive over most of the forecast period.

Bulls Say

Honda’s popular vehicles usually allow it to use fewer incentives than the Detroit Three, boosting the firm’s profits and improving the resale value of its vehicles.

Honda enjoys a reputation for quality, especially in America’s large coastal markets, but management is concerned about quality problems in recent years and Honda has slipped in U.S. J.D. Power quality rankings.

In 2021, Honda produced about 95% of its vehicles sold in the U.S. in North America. This means Honda is better positioned than Toyota (71%) to withstand the yen when it is very strong against the dollar.

Company Description

Incorporated in 1948, Honda Motor was originally a motorcycle manufacturer. Today, the firm makes automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. Honda sold 21.1 million cars and motorcycles in fiscal 2022 (4.1 million of which were autos), and consolidated sales were JPY 14.6 trillion. Automobiles constitute 63% of revenue and motorcycles 15%, with the rest split between power products and financial services. Honda also makes robots and private jets.

(Source: Morningstar)

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