The mention of Honda (HMC) brings back memories of my first trip to the Tokyo Motor Show in the late '90s. I was still a young sell-side analyst, but unlike many locally based analysts, I was able to stay awake for the entire presentation of then-CEO Hiroyuki Yoshino. Napping during analyst meetings may be a cultural thing, but I was laser-focused on Yoshino-san's message -- and this is one echoed throughout the company: Honda is an engine company. That's the DNA of the company.
Analyzing Honda's stock is never a simple task. It's not a pure play on cars. Honda's auto division represented just under 70% of the company's revenues in the first half of 2018. While most car companies have a captive finance subsidiary, no others generate more than 15% of their revenues from motorcycles and power products. Also, Honda's car business has a leading position in mini-cars (engine displacement under 660cc) in Japan, which represented about 45% of Honda's domestic sales last year.
Honda is not just a full-size car maker and is very well positioned for growth in China and India. Asia ex-Japan will represent about 40% of China's volume this year, exceeding the unit volume Honda sells in the U.S. and three times the volume Honda produces in Japan. Also, remember that as a mobility company, Honda benefits from any move toward motorized vehicles, and anyone who has ever walked the streets of Shanghai can attest to the fact that motorcycles are a very important means of transportation there. Mini-cars are important for emerging markets as well.
In a current market in which U.S. auto sales appear to have peaked, I find Honda's Asian exposure attractive. What about the future market, though? With "autonomous driving," "the connected car" and "electrification" the reigning buzzwords among auto companies, no auto company management can afford to avoid these trends. Honda was actually the first auto OEM to introduce an electric vehicle powered by a non-lead acid battery, but 20 years after its April 1997 introduction, Honda's EV Plus is merely a museum piece.
In terms of future mobility, I would put Honda in the "fast follower" category. The company will have an all-electric vehicle for sale in the European market by 2019 and aims to have vehicles with full, Level 4 autonomous driving capability on the roads by 2025. Honda is not ahead of the curve, and I would expect the company to partner with other entities in addition to its autonomous driving cooperation with Alphabet's (GOOGL) Waymo, a partnership that so far has yielded few benefits. (Alphabet is part of TheStreet's Action Alerts PLUS portfolio.)
So, how does one value Honda? Sadly, the time to buy Honda, as with Volkswagen and others (Nissan is going through this in Japan), is in the throes of a quality problem. Honda was the manufacturer most exposed to the Takata airbag scandal, and Honda's September quarterly results reflected a write-off of about $500 million for settlement of class-action litigation related to Takata's faulty inflators.
Honda's ADR shares hit a low of $26 last year as Takata news dominated, and have recovered to $33 per share today. As are all Japanese companies, Honda's on a March fiscal year, with consensus for fiscal 2018 pegged at $3.17 and fiscal 2019 pegged at $3.51. So on the basis of the next 12 months' earnings, Honda is trading at a P/E of 10. That's a premium to the 7.7x multiple being accorded General Motors (GM) , although as a former auto analyst I can state clearly that estimates for GM's EPS for 2018 are very, very aggressive. I don't think that's the case with Honda, and if anything I believe there is room for estimate increases as Honda's efforts to maximize production efficiency -- mono-zukuri in Japanese -- take hold.
For decades, analysts have speculated whether Honda has the critical mass to survive in the global auto industry, and the move toward future mobility only intensifies those questions. But as a potential shareholder, my question isn't who could buy Honda, but rather who is buying Honda? The answer: Honda is.
For the first time in six years, Honda management is buying shares in the open market, and management has pegged that figure at $800 million by the end of March. Management's confidence gives me confidence that the market is overpricing the risk of underlying cyclicality, and at 10x forward earnings vs. an S&P 500 that is now trading at 18x, I think Honda shares represent one of the few good values remaining among global equities.