Is it finally time to buy iconic-but-troubled automaker Honda (NYSE: HMC ) ?
It's a tough call. On the one hand, this maker of autos (and motorcycles, and other stuff -- more on that below) has a reputation for quality and innovation that was built painstakingly over decades. That reputation has led to tremendous brand equity and a base of fiercely loyal customers around the world. That's worth a lot, especially when the stock price has been beaten down, as Honda's was in 2011.
On the other hand, Honda has hit some trouble recently. The tsunami that hit Japan last March, and the floods that hit Thailand last fall, have played havoc with the company's ability to keep its auto factories running. That hit its profits (and stock price) hard in 2011. But Honda had big problems before the natural disasters, problems deep in its product-development process that led many to question whether the vaunted innovator had lost its way for good.
Lately, though, there have been signs that Honda's leadership gets it, that changes are finally under way. Is a revival in the works? And if so, does that make Honda's stock a buy?
Honda's business in 2011
Like a lot of automakers, Honda's stock had a rough ride in 2011, but unlike some, its fundamentals really were hit hard during the year:
|2011 Stock Return||(23.3%)|
|Revenue, Trailing 12 Months||$102.77B|
|Quarterly Revenue Growth (year-over-year)||(16.3%)|
|Earnings (EBITDA), Trailing 12 Months||$8.04B|
|Earnings Per Share, Trailing 12 Months||$1.57|
|Quarterly Earnings Growth (year-over-year)||(55.50%)|
|CAPS Rating (out of 5)||****|
Source: S&P Capital IQ and Motley Fool CAPS. 2011 market return from market open on 1/3/2011 through market close on 12/30/2011.
As bad as that was, it could have been a lot worse, and this is why shareholders can be grateful that Honda's not just an automaker. While autos make up the lion's share of the company's business, solid results in its other businesses -- particularly motorcycles and financial services -- have helped mitigate the damage. Consider these figures from the company's most recent quarterly fact sheet:
Percentage of Honda's Total Net Sales,
Operating Income (Loss) in Billions of Yen,
|Power products and other businesses||3.6%||0|
Source: Honda Motor Co.
Clearly, 2011 was anything but a "normal" year for Honda, and just as clearly, there's room for considerable upside once the company recovers. But how much upside? Or put another way, what will the new "normal" look like?
Looking forward by looking back
So much has shifted in the auto industry in recent years that finding a basis for comparison is somewhat tricky, but 2010 is probably our best bet. In 2010 -- before the tsunami, after the worst of the global economic crisis, while contending with a strong yen -- Honda earned $3.57 a share. That's more than double what it earned last year, and a result like that in 2012 could, at least it would seem, add a nice sum to Honda's stock price from here. Is it reasonable to expect earnings in that general neighborhood in 2012?
Maybe. Analyst estimates for the year are right in that ballpark. But it's a stretch to argue that that makes Honda a buy. Here's the thing that gives me pause: Honda's current stock price, which is a bit under $32 as I write this. Look at those earnings numbers again. Despite the tsunami and the floods and the product stumbles, Honda's currently trading at about 20 times its trailing-12-month earnings.
That's expensive for an automaker, even one as stable as Honda. Compare with Ford (NYSE: F ) , which is trading at less than 7 times earnings, or General Motors (NYSE: GM ) , which sports a P/E below 5. Granted, both of those are turnaround stories with credit ratings that are still below investment grade, so perhaps Nissan (OTC: NSANY) is a better comparison. Nissan, which mostly escaped the effects of the tsunami and saw solid sales growth in the U.S. and elsewhere in 2011, is trading right around 10 times earnings. That is -- pay attention here -- a normal multiple for a healthy automaker, historically speaking.
So what's going on with Honda's price?
The bottom line on buying Honda now
This doesn't require a deep-dive analysis: The market has already priced in most of Honda's recovery. If Honda were fully recovered as of Jan. 1, and if it had a year that looked a lot like 2010, we could expect a share price around $35-$36 in a year, assuming that 10-times multiple. That's easy math.
But Honda's not yet recovered: U.S. sales were down 18.8% in December versus the year-ago period, while rival Toyota (NYSE: TM ) -- which is also trading at a ridiculous multiple at the moment -- saw essentially flat results, suggesting that its inventory pipelines have largely recovered.
Honda was hit harder than Toyota by the flooding in Thailand. It's probably still a month or two away from a full inventory recovery. Even if the rest of the year goes well, that'll hurt the current quarter's earnings. Maybe Honda's calendar-year 2012 earnings will come out around $3.20-$3.30 a share, a bit below 2010's numbers. At a multiple of 10, that puts the stock price... right about where it is now.
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