Honda Profit Rises on SUV Sales and Currency Swings

By John

Buyers in the U.S. and China flocked to Honda's CR-V during the quarter, helping Honda to a nearly 7% increase in profits. Image source: Honda.

Honda reported on November 4 that its net profit rose 6.9% to 127.7 billion yen ($1.05 billion) in the quarter ended September 30, on sales gains in China and North America and favorable exchange-rate shifts. It also raised its full-year revenue forecast slightly.

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Honda's net profit fell short of the consensus Wall Street estimate of 129.12 billion yen. Honda's shares fell almost 3% in morning trading in New York after the news was released.

Honda results: The raw numbersHonda's fiscal year begins on April 1; for Honda, the three-month period that ended on September 30 was the second quarter of fiscal 2016.

Starting with fiscal 2016, Honda is reporting its quarterly results under international accounting standards, a change from past practice. It recalculated its prior-year results under the same standards in order to give investors an accurate year-over-year comparison.

Financial results are shown in yen.

What happened with Honda this quarter?Honda attributed the jump in revenue to increased sales in North America and China, and to the continued weakness of the yen. Honda reports its results in yen, and every dollar it earns in the U.S. was worth (on average) 18 more yen than in the year-ago quarter.

Honda's auto sales in North America rose 9% to about 473,000 units, mostly on the strength of Honda's small crossover SUVs, the CR-V and HR-V. Crossover SUVs have been exceptionally hot sellers in the U.S. all year, and the CR-V is a strong contender in the high-volume compact SUV segment. The one-size-down HR-V is new to North America this year; sales have already been growing steadily.

Honda's auto sales in Asia (not including Japan, which Honda reports separately) rose 15.8%. Much of the growth came from China, where compact crossovers are also writing a good sales story. CR-V sales were up in China, and the new Vezel and XR-V are off to strong starts. The Vezel is a near-twin to the HR-V, while the XR-V is a sportier two-door hatchback version of the Vezel.

Those gains more than offset weaker results in other regions: Honda's auto sales in Japan, Europe, and the rest of the world were all down slightly year over year.

Honda's motorcycle sales were up in North America and some parts of Asia, down slightly in Japan, and down more dramatically in South America. The net result was a slight (22,000, or 0.5%) year-over-year increase.

Honda's sales of "power products," a category that includes lawn mowers, portable generators, and the engines that Honda supplies to makers of other products, rose 2.3% year over year.

Still, despite the jump in revenue, Honda's operating profit fell. Honda attributed that to "quality related costs," namely the ongoing costs of recalls related to the massive Takata airbag scandal. Takata's airbags can deteriorate over time and explode without warning; over 20 million cars have been recalled to replace them. Honda announced on November 3 that it will not use Takata's airbags in its future models, currently under development.

Honda's operating profit margin of 4.6% was a bit weaker than the most recent quarterly results from some key rivals. Ford's global operating profit margin was 6.5% for the same period; General Motors' was 8%. Compared to Honda, both Ford and GM have broader lines of high-profit-margin trucks and SUVs in the United States, as well as larger operations in China.

Looking aheadHonda boosted its full-year forecast for revenue to 14.6 trillion yen, up from its earlier forecast of 14.5 trillion yen for the fiscal year that will end on March 31, 2016. It anticipates a small positive gain from the weakness of the yen. Honda maintained its previous guidance for a full-year net profit of 525 billion yen, with an operating profit margin of 4.7%.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believeconsidering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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