Does Honda Stock Have Upside As Automotive Market Recovers?

At the current price near $29 per share, we believe Honda Motors’ stock (NYSE: HMC) has a moderate upside in the near term. HMC stock has remained flat at $29 since the start of the year compared to the S&P 500 which has increased by 13% in 2020. The stock has performed worse than the market as the automotive industry was majorly hit due to the pandemic. Honda saw revenue fall 24% in the first 2 quarters of FY 2021 (FY ends in March). For Q2 2021 (ended Sep 2020) revenue was nearly flat at $34 billion while earnings improved to $1.32 compared to $1.03 in the same period of the previous year. Revenue and earnings recovery were driven by automobile and the life creation business (advanced engine technologies) with a positive volume growth.

The company has seen earnings fall over the recent years, while its P/E multiple has risen offsetting the fall in share price. We believe the stock is has a moderate upside in the near term. Our dashboard What Factors Drove -16% Change In Honda Motor Stock Between 2018 And Now? provides the key numbers behind our thinking.

The -15% fall in HMC stock price from FY 2018 to now is justified by a significant fall in earnings during those two years. Honda’s revenue was flat over the period at $138.9 billion (¥15.7 trillion) in FY 2020 (ended March 2020). Net Income margin decreased from 6.9% in FY 2018 to 3.1% in FY 2020. On a per share basis, earnings went down from $5.32 to $2.46. The fall in the margin was primarily due to higher operating expenses.

During the same period, the P/E multiple rose from 6.5x to 9x. The P/E improved in recent weeks as the company and sector are showing signs of recovery. Currently the multiple stands at 11.8x.

Where Is The Stock Headed?

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The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Honda’s revenues and earnings took a hit for the first half of FY 2021, though there are signs of recovery in Q2 2021 as the company reported flat revenue and a growth in earnings compared to the same period in 2020. Q2 2021 also saw the automobile sector improve sales volume by 1% y-o-y to 1,235K units while sales volume for the life creation segment (formerly power products) rose by 18.6% y-o-y to 1,370K.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on FY 2022 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. As per Honda’s valuation by Trefis, we have a price estimate of $31 per share for HMC’s stock, reflecting a 7% potential rise from its current level.

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