Tag: US Market
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.
and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.
BorgWarner is also well positioned for growth in hybrids and battery electric vehicles. The Delphi acquisition adds electric and electronic controls to BorgWarner’s electric motors and driveline technologies. Regardless of the powertrain automakers chose, BorgWarner’s revenue growth potential remains unchanged. BorgWarner’s drivetrain business includes wet dual-clutch and torque transfer technologies. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings.
Financial Strength:
BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt. BorgWarner has adequate liquidity and can generate sufficient free cash flow to weather cyclical turns and to meet its financial obligations. The company refinanced a $251 million senior note that was due in September 2020.
Bulls Say:
- Global clean air legislation enables BorgWarner’s topline growth to exceed worldwide growth in demand for light vehicles.
- The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies.
- Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.
Company Profile:
BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produce e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.
(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 Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, the acquisition of Starwood has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.
Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages.
Future Outlook
It is expected that room growth for Marriott averaging midsingle digits over the next decade supported by the company having around 20% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2020.
With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.
Marriott’s Demand Set to Rebound Further in 2022
Marriott’s third-quarter revenue per available room, or revPAR, improved to 74% of 2019 levels ,up from 56% last quarter ,driven by rate recovering to 96% of prepandemic marks.
Meanwhile, Marriott’s brand advantage remains intact. Marriott’s EBITDA margins improved to 17.3% from 14.5% a year ago. It is observed that high-teens operating margins in 2030, compared with the low-double-digit prepandemic average, aided by cost efficiency offsetting wage inflation.
It is expected that leisure travel to remain robust, but we expect business travel to recover in 2022. In this vein, Marriott noted that business travel bookings have recently picked up, and that group 2022 revenue on books is down about 20% from 2019, with rooms down 23% and rate up 4%.
Financial Strength
Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As a result, Marriott has enough liquidity to operate at zero revenue through 2022, and at second half of 2020 demand levels the company was around cash flow neutral.
Bulls Say
- Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element.
- Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to sustainably work from remote locations.
- Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.
Company Profile
Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents around 9% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.
(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.