Research Proposal on "Honda Motor Company"

Research Proposal 15 pages (3864 words) Sources: 5

[EXCERPT] . . . .

Honda Motor Company (NYSE: HMC) is a worldwide producer of motorcycles, automobiles and power products. They are the #6 automobile manufacturer in the world, the #1 motorcycle manufacturer and the #1 engine maker. Based out of Tokyo, Honda trades on the Tokyo Stock Exchange, and as an ADR on the New York Stock Exchange. The firm employs approximately 185,000 workers. In addition to the physical products that Honda produces, the firm also earns income from Honda Financial Services, which provides financing for consumers with which to purchase Honda products. Despite a long history of strong growth, Honda has recently struggled, as have almost all automotive manufacturers.

In 2008, the company's profits showed deterioration. Finally, in Q3, which ended 12/31/08, Honda lost money, almost 4 trillion. This paper will analyze Honda, and attempt to determine whether or not Honda remains a good investment. The company's history, financials and future outlook will all be analyzed. At the end of the paper, a recommendation will be made with respect to Honda's stock.

History

Honda was founded by Soichiro Honda in 1946 and the next year introduced its first product, which was the a-type bicycle engine. The company was reorganized in 1948 as Honda Motor Company. The company continued to focus on motorcycles throughout the 1950s, and in 1959 opened their first outlet in the United States, a small storefront in Los Angeles. By 1963 Honda had begun manufacturing automobiles, beginning with the S500 sports car. In 1966, the company introduced its first compact car, the product that would eventually bring it tremendous success in North America.

That success was spurred by the introduction of the Honda Civic, which debuted in 1972. The company opened its first overseas manufacturing facility in the United States in 1979, making it the first Japanese automaker to do so. The company continued to build on its success in the American automobile market throughout the 1980s. They launched the Acura division in 1986 and by 1989 had the best-selling car on the market in the Accord. The company by this point had also expanded into a wide range of other products, including power tools, lawnmowers, generators, boat engines and other engine-drive products.

Throughout its history, Honda has been one of the technological leaders in the automotive industry. This has long proved to be a substantial source of competitive advantage. The company is now a leader in robotics and has moved into aircraft manufacturing. Honda is also at the head of the curve with respect to developing vehicles powered by alternative sources of energy.

Financial Data

In the past five years, Honda has enjoyed steady growth, hampered only recently by the global economic downturn. Honda is profitable, liquid and in generally sound financial position.

The company has grown revenues steadily over the past five years. Revenues have increased 47% in the past five years, a strong number for a firm that derives the bulk of its sales from markets that are both mature and intensely competitive. In the past year, however, revenues have declined. Q3 revenues for fiscal 2009 declined 16.7% compared with those of Q3 of 2008. This came after the company's revenues had essentially flatlined over the calendar year of 2008.

In terms of profits, Honda has remained profitable throughout the past five years. Profit growth, however, has been slower than revenue growth. Over the past five years profit growth has been 30.5%, and there was little to no profit growth from 2006-2008.

This past year has seen significant deterioration in profitability, from 200 billion profit in 2008 Q3 down to just 20 billion profit in 2009 Q3.

Some of the declines can be attributed to declines in sales. The company had modest increases on a few products in a few geographic regions but for the most part there was significant weakness in key markets. Unit sales of motorcycles were higher, driven by success in Brazil and Asia, where the economic crisis did not hit as hard. However, yen sales of motorcycles declined. Unit sales of automobiles and power products declined. Financial services sales showed a modest increase.

Another contributing factor to the declines has been declines in Honda's margins. Net margin has declined from 5.6% five years ago to 4.2% in fiscal 2008, and lower still in 2009. Gross margins have also declined, from 31.2% five years ago to 28.8% in 2008. This decline in margins indicates that the company is facing more intense competition and has had difficulty in containing key factor costs as a result.

Honda has healthy liquidity ratios. Their current ratio has improved over the past five years, from 1.09 in fiscal 2004 to 1.11 in fiscal 2008. The cash ratio has also improved over that same span, from 0.217 to 0.224. Despite the economic slowdown, liquidity continued to improve over 2008. The current and cash ratios at the end of 2009 Q3 were 1.12 and 0.17 respectively. The decline in the cash ratio reflects a slowing down in the company's inventory turn.

Honda has maintained a healthy capital structure. The debt ratio at the end of fiscal 2004 was 65.5% and at the end of fiscal 2008 it was 63.97%. Though it had climbed back up to 64.6% in the first three quarters of fiscal 2009, the company has demonstrated the ability to maintain its debt ratio despite the difficult financial times and revenue declines.

Honda's financial performance relative to its industry peers has been good. The company has consistently outperformed the industry over the past five years on several key measures, including gross and net margins, debt-to-equity ratio and ROE, ROI and ROA. The major area where the company has struggled, as indicated above, is inventory turn, where Honda not only trails the industry but has slipped in the recent quarters. However, this can be attributed to overproduction as a result of overestimating sales in Q3 2009, and the company may reduce production in the coming quarters in order to reduce existing inventory.

It should also be noted that Honda despite a weak calendar 2008, the company has built up its interest coverage substantially over the past decade. Because of this, Honda's has the financial strength to withstand further economic distress. They company has liquidity reserves and is operating within what management considers its ideal capital structure. We have even seen that strong sales in some developing markets overseas have helped to offset economy-based weakness in the U.S. And Europe.

There is some cause of concern, however, with respect to the recent burn rate. After years of capital accumulation, Honda has begun to see significant reductions in cash from operating activities. In the last quarter, this was specifically related to the company's working capital issues (the slowdown in inventory turn). If the burn rate of the last quarter continues, the company will be forced into a debt issue by fall in order to avoid a cash crunch.

Mergers & Acquisitions

Honda operates its business on the basis of three-year plans. Presently, they are in the middle of the 10th of these plans. Each of these plans has placed stronger emphasis on research and development as the key driver for success at Honda. Therefore, when Honda does engage in M&a activity, it is generally strategic, to acquire key technologies to assist in its research and development goals.

To that end, Honda has made a handful of minor acquisitions in recent years. They have acquired a motorcycle manufacturing plant in Malaysia, a Japanese parts manufacturer, a Japanese retailer, a Brazilian electronics manufacturer, a Japanese trucking company. One of the juicier rumors in recent years was talk of Honda acquiring Harley Davidson. Such an acquisition, however, does not fit with Honda's M&a strategy. No offer was ever tendered.

Honda is not afraid to divest itself of properties for which it no longer has value. For example, in 2005 it acquired British American Racing. Three years later, it moved to sell the Formula One team. Honda has also made other small divestitures in recent years, mostly from its stable of parts manufacturers. In total, Honda has made just 11 acquisitions in the past 20 years, and 13 divestitures.

Competition

Honda competes in a wide range of sectors, each providing a unique competitive environment. Their main businesses are automobiles, motorcycles, financing and power products. Honda also competes around the world. For most products, their key markets are North America, Japan and Europe. For motorcycles, they earn significant revenues in Asia and South America as well.

Automobiles represent nearly 78% of revenues. This industry is highly competitive in all of Honda's main markets. Honda is the #6 automaker worldwide and the #2 automaker in Japan (behind Toyota). They face intense competition both in terms of product and price. Honda has adopted a mass market strategy, with a competitive focus on differentiation. Honda attempts to use its technological superiority, particularly with respect to engine technology, to attain competitive advantage.

The automobile market is growing worldwide, but in Honda's key markets has begun to show signs of stagnation, a… READ MORE

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