Honda's Operating Profit Rises 27% Despite Strong Dollar

By John Rosevear Markets Fool.com

Honda Motor Co. (NYSE: HMC) said on Feb. 3 that its operating profit jumped 27% in the quarter ended Dec. 31, thanks to strong sales in North America and China and a big year-over-year drop in recall-related costs.

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Honda earnings: The raw numbers

The chart below shows how Honda's results for the quarter ended Dec. 31 compared with the year-ago period. Note that Honda's fiscal year starts on April 1; the most recent quarter is the third quarter of its 2017 fiscal year.

All financial results are shown in billions of yen.

Metric Q3 FY 17 Q3 FY 16 Change
Revenue 3,501.0 3,617.2 (3.2)%
Operating profit 207.6 163.0 27.4%
Operating margin 5.9% 4.5% 1.4 ppts
Net profit 168.8 124.1 35.9%
Earnings per share (yen) 68.91 93.67 24.7%
Yen per U.S. dollar (average during period) 109 122 13 yen

Data source: Honda Motor Co., Ltd.

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The story of Honda's quarter in a nutshell

Here's the story in a nutshell: Retail sales of Honda automobiles and motorcycles both grew year over year, thanks to strong demand in North America and China and good margins on Honda's latest models. That -- plus the fact that Honda was hit by huge recall costs in the year-ago period--was more than enough to offset big losses related to an unfavorable shift in the yen's value versus the U.S. dollar.

Let's unpack that.

Honda sold more Civics in the U.S. than ever in 2016. Image source: Honda Motor Co., Ltd.

Sales of autos and motorcycles were both up year over year

First, Honda's sales of autos and motorcycles both grew year over year, up 6.8% and 2.6%, respectively. Auto sales rose 9.4% in North America on strong demand for the revamped Civic sedan, Ridgeline pickup, and (late in the quarter) the all-new CR-V. New models also helped auto sales in Japan (up 12.5%) and in Asia (up 4.8%) to some extent, although a weak result in India somewhat offset strong sales growth in China.

That sales growth helped boost Honda's operating profit and margin. And those new models are more profitable than the vehicles they replaced, Honda Executive Vice President Seiji Kuraishi explained, in part because Honda designed them that way and in part because Honda has trimmed some costs from its new-product launches.

"We have changed the profitability of new models by using common parts and conducting value analysis and value engineering so that we manufacture competitive and attractive cars to boost profitability," Kuraishi said. "As for new models, we ended up postponing advertisements or using less advertisement expenses than initially estimated."

(Kuraishi is Honda's second-highest-ranking executive after CEO Takahiro Hachigo.)

Honda's profit growth also reflected the fact that it was hit by huge recall costs related to the Takata airbag-inflator scandal in the year-ago period. (That scandal affected many automakers, but Honda was hit harder than most. Learn more here.)

Why a rise in the value of the U.S. dollar dented Honda's revenue

On the other hand, Honda was hurt by a big shift in the value of the U.S. dollar in yen terms. At the beginning of the quarter, one U.S. dollar was worth about 101.5 yen -- but by the end of the quarter, that same dollar was worth a little over 116 yen. On average, for the quarter, a dollar earned by Honda inthe U.S. was worth 109 yen at home.

That's a big increase in value for the yen compared to the year-ago quarter, when a dollar earned in the U.S. was worth an average 122 yen at home. That pushed Honda's operating margin in North America down to a thin 4.1% (in yen terms), versus a healthier 7% in Japan and 9.7% in Asia.

That shift explains why Honda's revenue dropped 3.2% year over year despite gains in auto sales, motorcycle sales, and the company's financial-services unit.

Looking ahead: Honda boosted its full-year guidance

Honda raised its revenue, profit, and sales forecasts for the full fiscal year that will end on March 31 (Honda's fiscal 2017), as exchange rates are becoming more favorable and sales in Asia are running higher than it previously expected.

  • Revenue: Honda now expects full-year revenue of 13.8 trillion yen ($118.2 billion), down 5.5% from a year ago. It had previously forecast an 8.2% year-over-year drop.
  • Net income: Honda now expects net income of 545 billion yen ($4.67 billion) for the year, up 58.2% from a year ago. That's up from an earlier forecast of 415 billion yen ($3.56 billion).
  • Global vehicle sales: Honda now expects sales to rise 5.5% to 5.0 million vehicles for the full fiscal year. That's up slightly from an earlier forecast of 4.98 million vehicles sold for the full year.

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John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.