Tag: Top Stocks

Business Strategy and 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 24% in 2020. In 2020, cars made up 41% of Honda’s U.S. sales mix.Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil,  but 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. 

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. 

Honda Is Fighting the Chip Shortage With a Strong Balance Sheet

Honda’s fiscal 2022 second quarter showed more semiconductor shortage problems than rival Toyota. Honda said on its earnings call that the chip shortage impact is worse than it previously thought so it has lowered fiscal 2022 earnings guidance after raising it in August. Operating profit is now guided to JPY 660 billion yen, down from JPY 780 billion, which is the originally guided figure on May 14. Total company revenue, however, is guided to JPY 14.6 trillion, down from JPY 15.45 trillion in August and JPY 15.2 trillion in May. 

Second-quarter total company operating income fell by 29.7% to JPY 198.9 billion, with a JPY 114.1 billion unfavorable variance from lost revenue more than offsetting a JPY 36.7 billion favorable foreign exchange contribution and slightly lower overhead costs.

Financial Strength

Honda’s financial position is excellent, as the company has a small debt load. We estimate Honda’s cash and available credit lines at March 31, 2021, to be about JPY 6.7 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 2.6 trillion in cash at the end of September. We calculate a net cash position at Sept. 30, excluding the captive finance arm, of over JPY 1.8 trillion. As of year-end fiscal 2021, the consolidated company has JPY 3.9 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. We do not see Honda having any problems meeting debt maturities, and we expect the company even before financial services results to be free cash flow positive over our forecast period.

Bulls Says 

• 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 2020, Honda produced about 96% 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 Profile

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 19.7 million cars and motorcycles in fiscal 2021 (4.5 million of which were autos), and consolidated sales were JPY 13.2 trillion. Automobiles constitute 65% of revenue and motorcycles 14%, with the rest split between power products and financial services. Honda also makes robots and private jets.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris’ brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Polaris had sacrificed some financial flexibility after its transformational acquisitions of TAP (2016) and Boat Holdings (2018), but debt-service metrics have been rapidly worked down via EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA set to average around 1.1 times over our forecast). As evidenced by solid ROICs (at 17%, including goodwill, in 2020), Polaris still has top-notch brand goodwill in its segments, supporting consumer interest and indicating the firm’s brand intangible asset is intact.

Financial Strength:

For Polaris exiting the recession, rising profits led to increases in company equity, which helped reduce debt/capital from 49% in December 2009 to 31% in December 2015. With the addition of leverage from the acquisition of TAP (which the company paid $655 million net of $115 million in tax benefits for in 2016), and the financing of Boat Holdings in 2018, Polaris ended 2019 with debt/adjusted EBITDA just above 2 times and debt/capital of 60%. However, robust demand and successful execution through COVID-19 has restored the metric to 1.5 times at the end of 2020, a very manageable level which the company should be able to maintain. Additionally, Polaris is poised to produce strong cumulative free cash flow to equity over the next five years’ worth around $3.2 billion.

Bulls Say:

• Polaris has historically had a strong reputation for innovation, and new product lines and acquisitions have supported solid performance in both strong and difficult environments. 
• Profit margins could tick up faster than we expect with faster than enterprise average volume growth from the sizable off-road and low-operating expense Boat Holdings business segments. 
• Management remains focused on operating as a bestin-class manufacturer. With continutious improvement at existing facilities, the pursuit of excellence should support stable operating margin performance.

Company Profile:

Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, small vehicles, and on-road vehicles, including motorcycles, along with the related replacement parts, garments, and accessories. The firm entered the aftermarket parts segment in 2016, tying up with Transamerican Auto Parts and then tapped into boats through the acquisition on Boat Holdings in 2018, offering exposure to new segments of the outdoor lifestyle market. Polaris products retailed through 2,300 dealers in North America and through 1,400 international dealers as well as more than 30 subsidiaries and 90 distributors in more than 120 countries outside North America at the end of 2020.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.