Has Honda Motor Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Honda Motor (NYSE: HMC  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Honda Motor.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(5.4%)

Fail

 

1-Year Revenue Growth > 12%

4.6%

Fail

Margins

Gross Margin > 35%

26.1%

Fail

 

Net Margin > 15%

3.6%

Fail

Balance Sheet

Debt to Equity < 50%

87.1%

Fail

 

Current Ratio > 1.3

1.34

Pass

Opportunities

Return on Equity > 15%

7.1%

Fail

Valuation

Normalized P/E < 20

14.29

Pass

Dividends

Current Yield > 2%

2.9%

Pass

 

5-Year Dividend Growth > 10%

(6.0%)

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Honda Motor last year, the company has picked up a point. Yet while a small boost in current ratio is a nice thing to see, more important has been the recovery in revenue growth, which has helped give the stock a modest gain of around 5% in the past year.

Honda has had to deal with some huge issues in the past couple of years. With the Japanese earthquake and tsunami in early 2011, Honda and rival Toyota faced the monumental challenge of recovering from huge disruptions in supply chains and infrastructure. For the most part, they've done a good job of getting back to the starting block.

Unfortunately, the rest of the world hasn't been standing still. Despite facing problems in Europe, both Ford (NYSE: F  ) and General Motors (NYSE: GM  ) have benefited from a solid auto market in the U.S., and GM in particular has had great success in penetrating the lucrative Chinese auto market. Meanwhile, Tesla Motors (Nasdaq: TSLA  ) has started making deliveries of its Model S all-electric vehicle, and while many are skeptical about whether electric vehicles will make huge inroads in the industry, it's still something that Honda has to take into consideration in building strategy.

Interestingly, one area where Honda may have a big advantage is in natural-gas-powered vehicles. Even as Clean Energy Fuels (Nasdaq: CLNE  ) starts to build out infrastructure for natural gas fueling stations, Honda's natural-gas-powered Civic is regaining popularity, despite having been in existence since the late 1990s.

For Honda to keep improving, it needs a revolution in its way of thinking. Having developed a reputation for quality, Honda has coasted for a long time, and now the company needs to reinvigorate its innovation if it wants to stand out from the crowd once again.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Taking advantage of Clean Energy Fuels could be a smart way for Honda to move forward. Learn everything you ought to know about the natural-gas infrastructure play in the Fool's latest premium report about Clean Energy Fuels. Each report includes a year's worth of free updates, so don't wait -- read yours today.

Click here to add Honda Motor to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Tesla. Motley Fool newsletter services have recommended buying shares of General Motors, Tesla, Clean Energy Fuels, and Ford. Motley Fool newsletter services have also recommended creating a synthetic long position in Ford. 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 Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2012, at 10:32 AM, lilsdad wrote:

    Gawd, I hate it when MF asks if such and such company is the "perfect stock". There is no perfect stock. Come up with a better hook.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1998463, ~/Articles/ArticleHandler.aspx, 9/16/2014 11:57:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement