Book Profit on This NYSE-Listed Automobile Major – HMC

Feb 24, 2022 12:00 AM PST | Team Kalkine
Book Profit on This NYSE-Listed Automobile Major – HMC


Honda Motor Co., Ltd.

Honda Motor Co., Ltd. (NYSE: HMC) is a Japanese conglomerate engage in designing, manufacturing and marketing motorbikes, automobiles, financial services, and life creation business. Its Motorcycle division includes all-terrain vehicles (ATVs), side-by-side (SxS), and motorbikes. Its Automobile segment provides automobile parts. The Financial Services section includes sales finance and leasing. Life creation and other enterprises offer power products and other associated components. HMC has 1.81 billion American Depository Shares (ADS) listed and outstanding (each ADS representing one ordinary shares).

Why Should Investors Book Profit?

  • Weak Liquidity Profile: The company's current ratio at the end of 9MFY22 is 1.38x, compared to the industry median of 2.04x. This implies relatively lackluster liquidity profile against the industry median.
  • Declining Fundamentals: Net revenues fell 10.59% YoY to JPY 9,546.71 billion in 9MFY22 (ended December 31, 2021) from JPY 10,677.01 billion in 9MFY21. It also reported a reduction in net income in 9MFY22 to JPY 444.10 billion vs. USD 582.17 billion in 9MFY21.
  • Leveraged Balance Sheet: The company is more exposed to balance sheet risk than its peers, with a Debt/Equity ratio of 0.78x as of December 31, 2021, compared to the industry norm of 0.46x. Furthermore, its long-term debt-to-total-capital ratio was 25.5%, compared to the industry average of 20.2% for the same period. These leveraged financials put the corporation at risk of huge swings due to the slightest adjustment in interest rates.
  • Purchasing and Procurement Risk: HMC strives to buy items at low prices and on schedule; thus, it buys raw materials and parts from various sources, relying on a few suppliers for key raw materials. Its capacity to keep acquiring these supplies in a timely and cost-effective manner is dependent on several circumstances, some of which are out of its control. Any failure on the contractual obligation by vendors could harm its operations.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

HMC's share price has inclined 10.15% in the past twelve months and is currently leaning towards the higher band of the 52-week range of USD 27.11 to USD 33.42. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 26.14.

Considering the company's declining financials, highly leveraged balance sheet, weak liquidity profile, current valuation and associated risks. we recommend a "Sell" rating on the stock at the current price of USD 30.88, down 0.96% as of February 23, 2022, at 03:01 PM ET.     

Three-Year Technical Price Chart (as of February 23, 2022, at 03:01 PM ET). Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.