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Can Honda's 2030 Vision and Restructuring Efforts Pare Woes?

Zacks Equity Research

Honda Motor’s HMC shares have scaled up 2.5% on a year-to-date basis, underperforming the broader industry’s growth of 10.2%. Notably, the Japanese automaker missed earnings estimates in the last two quarters.  The company has been bearing the brunt of high operating expenses and frequent recalls, which not only increase costs but also damage the firm’s reputation. In fact, it is the largest customer of the faulty Takata airbags that can explode and shoot out metal fragments after a crash.

Notably, in first-quarter fiscal 2020, the company reported operating profit of ¥252.4 billion, down 15.7% y/y amid high selling, general and administrative expenses; adverse impacts of foreign currency; along with lowered sales revenues. Further, the company expects revenues to decline 1.5% year over year to ¥15.7 trillion in fiscal 2020.

Also, Honda expects vehicle sales from Japanese, U.S. and Asian markets to decline moderately from a year ago. U.S.-Sino trade tensions will also impact its unit sales in China.

Amid these headwinds, the firm is making serious efforts to drive long-term prospects.While the stock might take some time to bounce back on the growth trajectory, retaining this Zacks Rank #3 (Hold) company in your portfolio seems to be a prudent strategy.

Let’s delve deeper into its initiatives and plans to boost performance.

Ready to Ride the Electric and Autonomous Wave

Honda’s 2030 Vision, which reveals the future path of the Japanese auto giant, emphasizes on electrified mobility products to achieve a zero-carbon society. The company’s focus on the development of EVs and self-driving cars bodes well in light of changing circumstances in the automobile industry. Honda aims to generate 66% of its global automobile sales from EVs by 2030.

By 2030, one can expect a wide range of electric, hybrid and other environment-friendly vehicles that will boost the firm’s prospects. In addition to electrification plans, Honda aims at rolling out level 4 autonomous vehicles for sale by 2025, driven by new technologies and robotics and AI-related services.

As part of 2030 Vision, Honda also aims at reducing development costs by focusing more on the coordination between research and development, as well as procurement and manufacturing of products. The firm also aims at developing collision-free-technologies to ramp up the safety of cars and improve connected mobility services.

Strategic Collaborations Boost Prospects

Honda has been undertaking frequent collaborations to expand business and bolster prospects. For instance, the company’s joint venture (JV) with GAC Group aims at building electric battery cars and plug-in hybrid vehicles in China to meet the country’s green car quotas.

Further, Honda’s deal with General Motors’ GM autonomous-driving Cruise arm focuses on developing effective shared autonomous vehicles to counter Tesla’s TSLA dominance. Per the pact, Honda had invested $750 million last year and aims to invest another $2 billion over the next 12 years to develop self-driving technologies.

Global Restructuring Moves to Result in Savings

As part of the global restructuring move, Honda has been taking steps to control costs and optimize production capacity. Amid Brexit uncertainty and slowdown in Turkish economic growth, the Japanese carmaker is planning to close both U.K. and Turkish factories by 2021 to streamline budgets for big spending plans on electrification.

Reportedly, the company is set to stop automobile production in Argentina by 2020. Resultantly, Honda will be able to lower fixed costs and vehicle production expenses, thereby generating savings that can be directed toward more profitable opportunities and rev up profits.

Last Words

While near-term headwinds in the form of high expenses and drab sales outlook remain, the firm’s initiatives look promising enough to bolster long-term prospects of the company, which carries a VGM Score of B. Meanwhile, investors interested in the auto sector can consider Lithia Motors LAD, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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