Gas Prices Up? Here Comes Honda!

Buried in the sea of (mostly good) auto-sales data that washed ashore in early March was this interesting tidbit:

The best-selling compact car in America so far this year is Honda's (NYSE: HMC  ) Civic.

That surprised me, and I don't think I was the only one. While the Honda Civic is one of the world's great automotive brands, the current car has been widely panned by reviewers -- including its longtime fans at Consumer Reports. In the face of dramatically stepped-up competition from several other auto giants, it seemed like the Civic was due for a fall.

But car buyers, it seems, had other ideas. Is it time to take a closer look at Honda?

A surprising resurgence for a famous nameplate
The earthquake and tsunami that devastated northern Japan a year ago hit several of Japan's biggest companies hard, but few suffered more than Honda. Key suppliers saw their factories wrecked, and many of Honda's production lines ran at less than full speed for months as the company scrambled to replace lost parts orders.

Mother Nature added insult to injury when, just as Japan was recovering, flooding in Thailand damaged factories belonging to other key suppliers. Honda saw one of its own plants completely submerged. The automaker's recovery pace fell behind that of Toyota (NYSE: TM  ) , which had suffered heavy production losses of its own but was nearly back up to speed by the end of 2011. Honda's fourth-quarter earnings told the tale: down 41% from year-ago results.

But the last couple of months have seen a resurgence. Honda Civic sales were up 45% through February versus the year-ago period. The Civic has outsold both the Toyota Corolla, long the compact-segment leader, and General Motors' (NYSE: GM  ) Chevy Cruze, a surprisingly strong entry that led the segment for several months last year.

What's driving the Civic's success? While Honda has probably boosted its U.S. sales a bit by offering mild incentives -- such as low-cost financing -- to qualified buyers, simply having ample supplies of the car has surely made a huge difference. But beyond that, Honda has received some timely help from one of its perennial best sales boosters: rising gas prices.

Honda's sales helper: $4 gas
Gas prices are nearing $4 in many parts of the country, and already higher in some spots; I paid $4.03 for unleaded premium this morning at a gas station near Boston. Rising gas prices have long been a friend to the Japanese automakers, whose focus on fuel efficiency has helped them steal business from truck-heavy U.S. carmakers during past periods of high gas prices.

But here's the concern, and it's why I'm hesitant to jump too quickly on a potential Honda resurgence: The competition is a lot better this time around. While the latest Civic compares well with the Corolla, a dated design, it fares less well in reviewers' eyes against the Cruze, Hyundai's Elantra compact, and the designed-in-Germany Ford (NYSE: F  ) Focus -- the latter two of which were also all-new in 2011.

Still some significant problems to overcome
Honda's got other issues. While the Civic is selling well, Honda's other products are lackluster in comparison to class leaders. And the high yen is hurting margins; rival Toyota said last year that the yen's strength was costing them as much as $4,000 in profit per vehicle sold here.

Moving more production out of Japan will help overcome the currency disadvantage, and Honda has promised a product-line overhaul. Notwithstanding its recent sales success, a major refresh of the Civic is being rushed to market, and a new Accord sedan is due later this year.

Long story short, I think it's still too early to declare Honda a buy. While the company's not in bad shape, it doesn't have the momentum of fast-moving rivals like Ford, Hyundai, and Volkswagen (OTC: VLKAY). While that might come in time, I need to see more evidence that a product upgrade is really happening before I'll consider owning the stock.

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Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford Motor, ExxonMobil, and General Motors, as well as creating a synthetic long position in Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On March 18, 2012, at 9:46 PM, neamakri wrote:

    Eleven months ago I went car shopping. I wanted a Civic for the gas milage: bumped my head hard getting into the driver's seat. At 5'10" I was very dissapointed that a Japanese car maker would be so wrong on ergonomics.

    Anyway, bought an Accord. It has exceeded all my expectations. Just drove across West Texas with the cruise set at "maybe a little over 80". Even with a stiff side wind, no problem. Gas mileage is just about as advertised on the 2.5L.

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