Japanese automaker Honda Motor
How does a respected automaker that continues to grow its market share in the U.S. and nearly everywhere else manage to keep generating falling earnings? Well, there are several factors at play. The biggest impact resulted from a special gain of approximately $1.2 billion the company reported in its fiscal fourth quarter of 2006. In addition, raw material costs have increased significantly and the company added to its R&D expenses.
Those costs played a role in the 19.7% and 0.8% decrease in fourth-quarter and full-year earnings despite a favorable exchange rate and revenue gains of 9% and 11.9% for the quarter and year, respectively. Vehicle sales were up 6.3% in the U.S., 19% in Asia, and 11.3% in Europe. However, they were 3.4% lower in Japan as buyers on its home turf crave environmentally friendly mini-vehicles.
Looking ahead, there is more of the same in store for Honda. Management is predicting its net profit will fall 2.9% and operating profit will drop 9.6% despite an increase in revenue of 6%. It expects a stronger yen and a continuation of high raw material costs to weigh down profits.
Despite its recent struggles to generate positive earnings growth, Honda is no doubt spending money wisely on equipment and research costs, and is growing internationally. However, at some point investors are going to demand a rise in profits and its stock price, which is down about 14% so far this year. I would advise current shareholders to remain patient. Honda has tremendous brand recognition and, like Toyota
For more on the performance of automakers, check out:
- The Best International Stock for 2007: Honda
- Toyota's Battery-Powered Charge
- Japanese Cars' Big Road Trip
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Fool contributor Mike Cianciolo is thrilled with the performance of his Honda, even with the 112,000 miles logged. Mike doesn't own any of the companies in this article. The Fool has a disclosure policy.