- Honda sports Inferior financial and operating metrics versus automotive peers.
- The company has an unfocused lineup of asset-heavy product offerings.
- Continuing and increasing liability with Takata airbags and new Civic recalls could hurt Honda stock.
Honda (NYSE:HMC) has been the worst performing stock among the Big 5 automotive stocks for the past five years. As global economies recovered from the Great Recession, Honda has underperformed it's peers General Motors (NYSE:GM), Ford Motor company (NYSE:F), Toyota Motor Corp (NYSE:TM) and Fiat (OTC:FIATY). With a P/E ratio less than 10 and a dividend yield of over 3%, it may be tempting for investors to jump into Honda stock. however, Investors should stay away.
Honda Sports Inferior Financial Metrics
Car companies are capital intensive. They must purchase large amounts of assets like machines, property and tools to manufacture vehicles. When investors purchase a portion of a business through shares they expect the company's management to earn a high return on the assets purchased. Companies with a higher return on assets (ROA) are better investments since they earn more money with less investment.
Compared to it's peer Toyota, Honda has consistently underperformed on converting asset purchases into net income. I left off General Motors, Ford and Fiat Chrysler from this comparison due to the effects of foreign currency. The Japanese Yen has been very weak over the past few years leading to artificial increases in net income for exporters such as Honda and Toyota. Comparing companies domiciled in different countries in the current currency environment would be irrelevant.
Investors should note that Honda has earned a lower return on assets versus Toyota prior to the current Takata Airbag recalls. In an industry that is asset heavy such as auto manufacturing, investors should only invest in companies that generate the highest net income per dollar of asset. Toyota comes out on top on this key metric.
The second important financial metric that investors should care about is return on equity (ROE); a measure of how much income is generated for every dollar in equity. Similar to return on assets, Honda badly trails it's peer Toyota. Similar to return on assets, non-Japanese firms were left out due to the current currency environment.
Honda's underperformance in return on equity should worry investors more than their underperformance on return on assets. For every dollar in stock an investor purchases, they will earn a higher amount of net income with Toyota than Honda.
Honda Has A Unfocused And Diverse Product Lineup
Why has Honda underperformed Toyota in return on assets and return on equity? One reason is their unfocused and diverse asset heavy product line.
Toyota, Ford, GM and Fiat Chrysler produce automobiles only. They all have financial businesses as well but do not manufacture anything un-related to vehicles. These four automakers are focused on vehicle production.
Honda, in contrast, not only manufactures automobiles but also airplanes (Honda Jet), power equipment (Honda Power Equipment) and motorcycles (Honda Racing). This broad product lineup hurts Honda in two ways.
First, they lose focus. Selling automobiles and motorcycles is different than selling airplanes, lawn mowers and generators. The sales channels are different, the marketing is different and the consumer is different. Airplanes are not sold to consumers whereas cars, motorcycles and power equipment are. Vehicles are sold through dealerships while power equipment is often sold through third party retailers. With this broad product lineup, Honda cannot focus on winning with one sales channel and one consumer.
Second, airplane manufacturing is very asset heavy. The light jet market is saturated with the likes of Dassault Aviation, Embraer, Bombardier, Lear and Gulfstream. Honda's entry into this market required massive capital investment for a small chance of success. Honda's Management has not disclosed how much investment was made for the Honda Jet Business but the amount was likely very high.
If Honda continues to have an unfocused asset heavy product lineup, as illustrated by Honda Jet, the company will likely continue to achieve a lower return on assets than its competitors.
In the past year, the Takata airbag recall has effected Honda more than any other automakers. Of the 34 million vehicles recalled in the United States so far, nearly 7 million (20%) are made by Honda while Honda's market share in the United States is only 8.8%. Honda has been disproportionately affected by the recall.
Federal liability from regulators has thus far focused on Takata ($70 million and counting) but may spread to automakers as well. If regulators rule that automakers did not act quickly enough to disclose the issue or address it, Honda may face massive fines. With it's disproportionate share of recalled vehicles, Honda will likely have a disproportionate share of liability. This applies not just to federal fine but also civil liability. All nine deaths due to Takata airbags have occurred in Honda vehicles.
The Civic is Honda's highest selling vehicle in the United States typically accounting for over 25% of total US sales. Last week Honda ordered all 2016 Civic sales be ceased in the United States due to a faulty piston in the engine. Honda is currently 50% complete with the airbag recalls and now has to address a recall and stop orders for its best selling US vehicle. If the Civic piston issue is not addressed immediately Honda will not be selling it's highest volume car in the United States. This will have a large negative impact on their revenue and profits for upcoming quarters.
In conclusion, investors should stay away from Honda stock. The company generates less net income per dollar of asset and equity versus similar peer Toyota. Their unfocused product lineup prevents them from winning with a single sales channel or consumer. The company's airplane division, Honda Jet, requires massive capital to enter a very saturated market. Honda may also be faced with large fines due to the Takata airbag recall. All nine deaths worldwide linked to the airbags have occurred in Honda vehicles and Honda has a disproportionate number of vehicles in the recall. Unless Honda can address the engine issue with the 2016 Civic, it will not be able to sell it's flagship vehicle in the United States.
I drive a Honda and have only owned Honda vehicles. As much as I love my Honda Insight, I will not currently purchase stock in Honda Motor Company. I previously held shares a few years back but no longer do.
While the data above points to a bleak and gloomy future, there are rays of hope for Honda Motor Company.
First, Honda has a well earned reputation for reliability and value. Similar to how Toyota overcame it's braking recall in 2010, Honda will overcome the airbag recall. Consumers will continue to purchase Honda vehicles.
Second, the current currency environment with a weak Yen and strong Dollar will likely continue for the near future. Honda will benefit in this environment with it's large sales in the United States. General Motors and Ford will be hurt by the strong dollar while Honda and Toyota will benefit.
Finally, Honda's luxury division, Acura, may be on the rise. The flagship Acura NSX will soon be released in the United States and Acura sales have been rising the past year. Acura has never competed well against Lexus, BMW, Audi or Mercedes. Continuing strength for Acura may provide a tailwind that Honda has never experienced.