Over the last 12 months, stock in Honda (NYSE: HMC) has underperformed the big two U.S. auto makers, General Motors (NYSE: GM) and Ford (NYSE: F). Sensing there might be untapped value, I turned to Honda's balance sheet.
It's reasonable to use the changes in shareholder equity, exclusive of new stock issues, as a proxy for the value created (or destroyed) by a company's operations. Since 2000, Honda has added more than $6.6 billion to shareholder equity, a 37% increase, without issuing new shares. In contrast, both Ford and General Motors destroyed shareholder value with declines of $7 billion and $5 billion in book value, respectively. Honda's equity is 34% of total assets, compared to just 6% at GM and 4% at Ford.
Honda's debt is up 76% over the same time period, from $12.7 billion to $22.4 billion. Assets rose only 57%, indicating an increased reliance on debt financing, likely because of the prevailing low-interest rate environment. Total debt-to-assets ratio is currently 31%, up from 27.8%.
In comparison, GM has added $129 billion in new debt to its balance sheet (up 91%) since 2000, increasing its debt-to-assets ratio from 47.7% to 60.6%. Ford added only 9% more debt, keeping the debt-to-assets ratio steady at 58%.
Honda trades at only 1.5 times book value, and less than 9 times trailing earnings. Ford is priced at 2.4 times book, while GM is priced lower at 1.1 times. The trailing P/E for GM is 9.9, while Ford trades for a whopping 28.5 times trailing earnings.
During a tough economic period, Honda Motors managed to keep its balance sheet strong and add value for its shareholders, while the two U.S. auto makers destroyed shareholder equity and replaced it with debt. In my book, Honda's ability to create shareholder value gives it an edge over the other two.
It takes more than just a cursory look at a financial statement to determine a company's value, but with a stronger balance sheet, lower relative price than its American competition, and a strong lineup of automobiles, Honda Motors deserves some consideration as a value stock.
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Motley Fool contributor
Chris Mallon
is a funny-smelling guy who owns shares of Honda through his private investment partnership.
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