Honda Motor Co Ltd (HMC)’s Lowered Forecast Creates Questions for 2013

Honda Motor Co Ltd (ADR) (NYSE:HMC) delivered extremely strong quarterly performance in Q4 on the back of a U.S renaissance in car sales (due to aging fleets and hope) as well as improved operations after the 2011 Thailand floods. That said, however, its outlook remains weak due to headwinds in China and Europe. Honda achieved record sales in 2012 of 3.82 million units, an increase of 19%. Quarterly profits increased 62.6% to $851 million, but the annual forecast for FY 2013 has been reduced for the second time by 1.33% to $4.01 billion (¥370 billion from ¥375 billion) as Honda expects to sell 4.06 million cars versus the 4.12 million cars announced earlier. Results like this are creating real problems for the number three Japanese auto brand in the U.S., Nissan (NASDAQOTH:NSANY), as Toyota Motor Corporation (ADR) (NYSE:TM) also surged back in 2012.

The islands dispute between China and Japan has caused a slump in sales of all Japanese vehicle manufacturers after massive consumer boycotts and even vandalism. Moreover, the European debt crisis has created uncertainty in one of its primary markets where the demand for vehicles has dropped. Honda’s in China and Europe in the previous quarter fell by 87% and 68% respectively.

Honda’s consolidated motorcycle sales increased by 15.7% to 2.35 million units, with most of the increase coming from sales in India and Thailand. Total quarterly sales of automobiles, the backbone of Honda, increased by an impressive 35.2% to 841,000 units year over year. North America is the company’s biggest automobile market, where it sold 454,000 units (54% of the total) in the quarter, an increase of 24% from last year where vehicle sales were strong all throughout 2012, and Honda’s brand was obviously not damaged by the disasters which befell it in 2011. Asia recorded an even bigger increase in sales, 43% to 279,000 units. On the other hand, sales in Japan increased slightly by 1.5% while those in Europe remained flat.

However, despite the weakening yen, Honda decreased its full year outlook when the market was expecting the opposite. The yen has dropped by 16% versus the US dollar in the last six months. The impact of the yen’s drop to the income of Japanese car manufacturers was outlined by Nissan when it said the company expects a $220 million boost in operating profits when the yen drops by one against the dollar. Moreover, with the U.S market expanding in 2012 to 14.5 million vehicles, it begs a number of questions since Honda relies on North America for half of its sales, unlike Toyota or Nissan, which sell about a quarter of their vehicles in North America.

Is Honda being overly cautious on its outlook? Expecting softness in Europe and China to offset North American sales? Or is management more sanguine about the sustainability of the rally in U.S. car sales in 2013 than its rivals?  All of these are good questions, and the likely answer is all of the above. But, if China is going to be soft for Honda in 2013 then it’s even worse for Nissan.