Can Honda's Stock Gain Momentum After Q1 Results?

Headlines

• Honda Motor's stock has risen just about 2% this year, lagging behind broader indices and rival Toyota.

• The company is set to report its Q1 FY’25 results in early August, with expected revenues of around $33.7 billion, flat compared to last year.

• Honda experienced strong growth in FY’24, but projections for FY’25 indicate a slowdown in automotive unit sales growth and increased expenses in R&D and capital expenditures.

Japan’s second-largest automaker, Honda Motor (NYSE:HMC), has seen its stock rise by just about 2% this year, significantly underperforming broader indices. In comparison, rival Toyota (NYSE:TM) has seen its stock rise by 5% over the same period. Honda is poised to report its Q1 FY’25 results in early August, with expected revenues around $33.7 billion for the quarter, roughly flat versus last year and in line with consensus estimates. What are some of the trends likely to influence Honda’s quarterly results?

Honda had a strong FY’24 (ended March 2024), with revenue growing 20% year-over-year and net profits rising 70%. The company benefited from a weak yen (the yen declined about 7% versus the dollar over the last 12 months) and robust automobile sales post-Covid-19. Automobile unit sales grew 11% over the last fiscal year, although motorcycle sales remained almost flat. However, Honda’s growth is likely to slow in FY’25. Automotive unit sales are projected to rise just 2%, as the post-Covid demand surge wanes, with sales in China and Europe expected to decline due to economic headwinds and rising competition. However, business in the U.S. should continue to grow, driven by demand for its hybrid and gasoline-based models.

Margins might present a mixed picture as well. The company projects R&D expenses for the year to grow about 22% to 1,190 billion yen, while capital expenditures are expected to grow almost 70% year-over-year to 670 billion yen. HMC stock has seen little growth, gaining just about 5% between early January 2021 and now, compared to an increase of about 45% for the S&P 500 over this roughly three-year period. In comparison, Amphenol Corporation (NYSE:APH), a company that makes electronic connectors, has seen its stock rise by close to 2x over the same period, benefiting from the electrification of the auto industry.

Given the uncertain macroeconomic environment with elevated interest rates, it remains to be seen whether HMC will face a similar situation as it did in 2021 and underperform the S&P over the next 12 months or experience a strong surge. There are concerns about Honda’s longer-term prospects. The company has intensified its EV strategy, increasing investments into EVs even as demand cools, which is likely to impact profitability in the near term. Additionally, Honda's competitiveness in markets such as China, where local producers are experiencing a surge in demand for their electrified vehicles, remains to be seen. Moreover, Chinese-made vehicles are gaining global acceptance, with China poised to become the world’s largest car exporter this year, overtaking Japan, posing a potential threat to consumer stocks like Honda. The potential strengthening of the yen could also hurt revenue growth in the medium term (the yen gained about 5% versus the dollar over the last month).

That being said, Honda’s valuation is relatively reasonable, with the stock trading at about 7.5x projected FY’25 earnings. The company’s plans to boost share buybacks and potential gains in the hybrid automobile space are positive aspects for the stock. We value Honda stock at about $38 per share, which is approximately 20% above the market price. For more details on what’s driving our valuation for Honda, see our analysis of Honda Valuation. Also, see our analysis of Honda Revenue for more insights into Honda’s key revenue streams.