Japanese carmaker Honda's (NYSE:HMC) U.S. sales have been on a bumpy ride, and they are making investors anxious as the country is its biggest market. The recent first-quarter results did not alleviate these concerns, though the automaker reported decent sales and earnings growth and raised its outlook for the year. Does Honda's operating performance shed light on which direction the company is headed? And what would be its focus areas -- the tried and tested U.S. market, or new emerging markets? Let's look for answers in the quarterly numbers.
The number game
Honda's first-quarter operating profit increased 7.1% from the year-ago period on 5.4% revenue growth. It recorded operating profit of $1.92 billion, ahead of the $1.79 billion forecasted by Bloomberg analysts. Sales were $30 billion, in line with analyst estimates. Revenue grew on account of higher automobile and motor cycle sales, though power products sales remained an overhang. Automobile sales jumped 4.3% to 895,000 units aided by strength from emerging markets that offset the sales decline in North America, while Europe was flat.
Honda made good progress with cost cuts, but the impact was overshadowed by expensive recalls that largely offset the $240 million savings generated. However, the company got lucky with currency one more time as the Japanese currency fell 3 yen against the dollar compared with the same period last year. This resulted in a positive currency impact of $311.2 million during the quarter. Honda has kept its annual auto unit sales forecast intact at 3.8 million, but raised its full-year 2015 operating income expectation from $7.3 million to $7.4 million, and revenue forecast from $122.8 billion to $123.3 billion.
U.S. sales lagged, but Honda is hopeful
North America has been Honda's forte, with the company holding the second spot among Japanese automakers, behind Toyota, for decades now. But the third most popular Japanese carmaker in the U.S., Nissan (NASDAQOTH:NSANY), is breathing down Honda's back. In the June quarter, Nissan reported 13% sales increase to 446,000 vehicles, while Honda's sales slumped 3% to 480,000 for four-wheelers. Honda's sales were affected by delays in launching the remodelled Fit subcompact and the new luxury sedan Acura TLX. The company has an aging fleet. In addition, multiple recalls are hurting its brand image.
Nissan's U.S. market share went up to 8.6% through the first seven months of the year, from 7.4% in 2009. In contrast, during the same period, Honda's share decreased to 9.1% from 11% in 2009. Nissan is gaining from new product launches and its diverse product portfolio. The company sells as many as 27 models in the U.S., with the top three cars -- Altima, Sentra and Rogue -- accounting for 52% of its total U.S. sales. Honda has 16 models and depends more on its best-sellers -- Accord, Civic and CR-V crossover -- as they make up for 69% of the carmaker's U.S. sales.
Despite the recent sales setback, Honda has maintained its annual sales forecast for North America as the carmaker is certain that demand would improve in the coming quarters. It expects Fit and Acura TLX to ramp up sales, and it's preparing a huge marketing initiative centered on the latter. Honda also plans to introduce its latest compact sports utility vehicle (SUV) the HR-V, which is already doing well in Japan under the name Vezel.
Forbes has recently reported that analysts think Honda's product pipeline is stronger than the industry average, with the all-new Honda Pilot SUV due in 2016 and a remodeled Odyssey minivan due in 2017.
Strength in Japan and emerging markets could help sales growth
Honda recorded 44% unit sales increase in Japan in the quarter. The growth mostly came from orders placed before the sales tax hike effective from April 1. Due to the sales tax increase, Japan Automobile Manufacturers Association predicts that the industry's growth for the fiscal year ending March 2015 could fall 16%.
Unfortunately, Honda had to recall almost all the Vezels and Fits because of issues like unintended acceleration. This hurt brand image, and in April, new order level dropped to 80% of the year-ago period. However, the company is hopeful that this could be temporary. Executive Vice President Tetsuo Iwamura expects orders to return to last year's levels after Japan's summer holidays, which stretch from late July to early September.
Honda's overall performance in Asia was pretty impressive, far outpacing rivals Toyota and Nissan with an 11% unit sales growth.Thailand was a point of pain because of the political unrest, but the soaring demand in China, India, and Indonesia made up for it. Toyota's Asia sales took a hit of 2.4% and Nissan's sales were up just a tad at 1.2% in the June quarter. In contrast, Honda saw solid demand for remodelled Crider and Jade in China, City in India and newly launched Mobilio in Indonesia.
Emerging markets have the lowest car ownership rates and carmakers' hopes are tied to their prospects. While launching new Datsun Go in India, Nissan's CEO Carlos Ghosn said, "By 2016, around 60% of all global auto sales will come from high growth markets like India, Russia, China, South Africa, Indonesia and Brazil. In terms of penetration levels, the potential in these markets continues to be huge."
Honda is playing it safe by targeting the emerging markets with customized models that are suited to regional tastes. And the solid demand for Honda's cars in these markets is a testimony that the company is on the right track.
Foolish bottom line
The Japanese behemoth's optimism on regaining strength in the U.S. looks encouraging, but much depends on the success of its new cars such as the Fit, Acura TLX, and HR-V. Thankfully, the company has a strong pipeline that could drive future U.S. sales; until then, the emerging markets could be a good cushion. Honda's growing sales in these markets could pay off well and improve its future prospects, even in the face of mounting pressure from Nissan.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.