Honda Goes From Bad to Worse

Once upon a time, Honda (NYSE: HMC) was one of the world's most admired automakers. Long before Apple (Nasdaq: AAPL) conquered the consumer-electronics world with a similar approach, Honda's small, tightly focused lineup of polished-to-perfection vehicles was winning broad acclaim -- and exceptionally loyal customers -- all around the world.

But while the late Steve Jobs' minions can seemingly do little wrong nowadays, lately it seems that Honda can't do much right. News on Monday that the company had missed third-quarter earnings estimates and was withdrawing its forecasts drove share prices down nearly 4%.

Although the stock recovered a bit of ground today, Honda's shares are still down more than 30% from 2011's highs, hit shortly before the March tsunami that hammered the company's production and prospects. With production disruptions due to flooding in Thailand just the latest in a string of challenges to hit the once-proud Japanese automaker, is there any hope of a turnaround soon?

A rough quarter in an already rough year
Honda reported net income of 60.4 billion yen ($761 million) for the third quarter, a sharp drop from last year's 136 billion yen and significantly below the consensus analyst estimate of 66.1 billion yen. More than other major automakers, Honda is reeling from the floods that have disrupted production of vehicles and key parts in Thailand, an important production hub for several Japanese automakers as well as India's Tata Motors (NYSE: TTM)

Honda has already lost an estimated 200,000 units of production this year as a result of the March tsunami in Japan, and the company said last week that it hoped to make up about half of that shortfall by year's end.

But Honda's most recent announcements make that goal seem less likely: Production at Honda's six factories in the U.S. and Canada will be cut by about 50% through Nov. 10, the company announced Monday, due to Thai-flooding-related component shortages that have also hit suppliers to Apple and other electronics firms, including key hard-drive maker Western Digital (NYSE: WDC).

While the parts used in Hondas built in North America are mostly made here, a few critical parts, mostly electronics, are made overseas and shipped to the company's U.S. plants. As we learned in the wake of the tsunami, it's extremely difficult for automakers to shift production of some complex electronic components even under optimal conditions, and getting supplies elsewhere may not be possible in the short term.

Honda's U.S. dealers were warned that production cuts could continue through late December, according to an email obtained by Bloomberg. Honda also warned its dealers that production disruptions could delay by several weeks the planned introduction of the 2012 CR-V SUV, originally set for December.

That delay may not matter much in the long term, but it's a worrisome snag in a launch that Honda desperately needs to be successful. The CR-V is a critical model for Honda here, with more than 200,000 sold in the U.S. in 2010, and the launch of the all-new 2012 model will be watched closely by analysts. Honda's most recent product introductions have not gone well, to say the least. The latest Civic, introduced earlier this year, was slammed by critics including the all-important Consumer Reports, which had held Honda's products in the highest regard for decades.

A glimmer of hope for a turnaround?
Those product stumbles -- which started well before the latest Civic -- have led me to be dubious of Honda's stock even as a value play. Product is the key to an automaker's prospects around the world nowadays, and the simple truth is that Honda's recent efforts haven't compared well to the latest products from Ford (NYSE: F) and Hyundai, and, increasingly, General Motors (NYSE: GM) as well. While repeat business from Honda loyalists continues to drive respectable sales totals, in my view (and I'm far from the only one), Honda has been at risk of losing ground to the global leaders that may be nearly impossible to recover.

But a few hopeful signs have emerged recently. American Honda executive John Mendel told Automotive News last week that the company has accelerated work on a planned update for the Civic, originally due in 2014. Criticism of the Civic has been heard at the highest levels of the company, Mendel said, and work on significant enhancements is under way -- but those enhancements are unlikely to arrive before 2013.

Of course, it's one thing to promise improvements, another thing to deliver a vehicle that compares well with the leading products in its class. For a long time, the Honda Civic, along with Toyota's (NYSE: TM) Corolla, was that class-leading product. But like its corporate parent, the car hasn't kept up with the rapid changes that have turned the industry's pecking order upside down. While this indication that Honda recognizes the problem is encouraging, it's the solution -- and the new products Honda introduces in the interim -- that will tell us whether the company is finally recovering its once-vaunted product mojo. Until we know, I'll be steering clear of the company's stock.

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