North American Hybrid EV Expansion Will Secure Global Success

Key Takeaways

• Expanding hybrid EV sales in North America may stabilize revenue and improve net margins, countering tariff impacts.
  
• Honda's planned share repurchase and revised dividend policy aim to enhance shareholder value and stabilize dividends, boosting investor confidence.
  
• Tariffs, declining sales, increasing R&D expenses, currency fluctuations, and delayed investments are key risk factors impacting Honda's profitability and growth potential.

Catalysts

Develops, manufactures, and distributes motorcycles, automobiles, power, and other products in Japan, North America, Europe, Asia, and internationally.

• The motorcycle business is experiencing strong global sales and profitability, with plans to increase unit sales to 21.3 million, which could boost revenue and operating profit margins.
  
• Hybrid EV sales are expected to expand in North America despite tariff impacts, which could secure stable revenue and potentially improve net margins due to their better profitability compared to traditional vehicles.
  
• Honda is delaying large-scale investments in EV manufacturing in Canada due to slowed market growth, indicating a focus on capital efficiency and potentially improving net cash flow in the short term.
  
• A change in dividend policy to improve capital efficiency and ensure stable shareholder dividends may drive confidence and attract investors, potentially boosting earnings per share.
  
• A planned repurchase of ¥1.1 trillion in shares reflects efforts to optimize capital structure, which could enhance shareholder value and improve earnings per share.

Honda Motor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Honda Motor's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 4.8% in 3 years time.
• Analysts expect earnings to reach ¥1097.4 billion (and earnings per share of ¥238.78) by about May 2028, up from ¥835.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.1x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Auto industry at 8.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.91%, as per the Simply Wall St company report.

Honda Motor Future Earnings Per Share Growth

Risks

• The impact of tariff policies is significant and uncertain, particularly the USMCA-related tariffs, which could negatively affect operating profit and create volatility in earnings. Tariffs from the United States-Mexico-Canada Agreement (USMCA) could decrease the financial strength of the automobile business.
  
• Declining sales volume in the automobile sector, especially in China and ASEAN regions, coupled with increased incentives needed to boost EV sales, could potentially erode margins and affect overall revenue and profitability.
  
• Increased research and development expenses associated with the pivot to electrification, including EV and hybrid technology development, are substantial. If EV market growth continues to slow, these expenses might not be offset by commensurate increases in revenue, potentially impacting net earnings.
  
• Currency exchange fluctuations, particularly the depreciation of emerging market currencies against the U.S. dollar, are projected to cause a substantial decline in profit. This exposure to forex volatility could negatively impact operating cash flow and net profit.
  
• Postponement of large-scale investments, such as the delayed EV project in Canada due to slower-than-expected electric vehicle market growth, indicates potential reevaluation of growth strategies. This could slow down future earnings potential and delay expected revenue from those projects.

Valuation

• The analysts have a consensus price target of ¥1672.238 for Honda Motor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥2100.0, and the most bearish reporting a price target of just ¥1250.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥23014.3 billion, earnings will come to ¥1097.4 billion, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of ¥1406.0, the analyst price target of ¥1672.24 is 15.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.