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Honda Motor Co. Ltd. (HMC - Analyst Report) posted a 46.4% rise in earnings to ¥120.3 billion ($1.23 billion) or ¥66.79 (68 cents) per share in the second quarter (ended Sep 30, 2013) of fiscal 2014 from ¥82.2 billion or ¥45.63 (46 cents) in the same quarter of the prior fiscal year.

Consolidated net sales and other operating revenues grew 27.3% to ¥2.89 trillion ($29.6 billion). The increase was attributable to higher revenues in the automobile and motorcycle business operations as well as favorable foreign currency translation effects.

Consolidated operating profit surged 70% to ¥171.4 billion ($1.75 billion) from ¥100.8 billion in the second quarter of fiscal 2013, driven by higher sales volume and model mix along with favorable foreign currency effects, partially offset by higher SG&A expenses.

Segment Performance

Revenues in the Automobile segment rose 26.2% to ¥2.23 trillion ($22.8 billion) on a 6.5% rise in consolidated unit sales to 869 thousand vehicles and favorable foreign currency translation effects. Operating profit surged 115.8% to ¥80.1 billion ($820 million) on the back of increased sales volume and model mix and favorable foreign currency effects, partially offset by increased SG&A expenses.

Revenues in the Motorcycle segment scaled up 35% to ¥418 billion ($4.3 billion), owing to higher consolidated unit sales and favorable foreign currency translation effects. Consolidated unit sales rose 12.2% to 2.6 million motorcycles. Operating profit surged 79.3% to ¥45.5 billion ($466 million) on improved sales volume and model mix along with favorable foreign currency effects, partially offset by higher SG&A and R&D expenses.

Revenues in the Financial Services segment increased 30.4% to ¥170 billion ($1.7 billion) due to higher revenues from operating leases and favorable foreign currency translation effects. Operating income rose 21.7% to ¥46.5 billion ($477 million), attributable to favorable foreign currency effects.

Revenues in the Power Product and Other segment escalated 12.6% to ¥73.1 billion ($748 million) driven by favorable foreign currency translation effects. Unit sales in the segment inched up 0.5% to 1.3 million. The segment incurred operating loss of ¥0.8 billion ($8 million), due to increased SG&A expenses in other businesses.

Financial Position

Consolidated cash and cash equivalents declined to ¥1.13 trillion as of Sep 30, 2013 from ¥1.21 trillion as of Mar 31, 2013. Total debt amounted to ¥5.4 trillion as of Sep 30, 2013, translating into a long-term debt-to-capitalization ratio of 49.6%, compared with ¥4.9 trillion or 49.2% as of Mar 31, 2013.

In the first half of fiscal 2014, cash flow from operations improved to ¥671.5 billion from ¥323.3 billion in the first half of fiscal 2013, primarily as a result of higher cash receipts due to better automobile sales, which offset the increase in payments for parts and raw materials. Meanwhile, capital expenditures increased to ¥356 billion from ¥282.3 billion in the first half of fiscal 2013.

Guidance

For fiscal 2014, Honda has projected revenues to increase 22.5% to ¥12.1 trillion. Operating profit is expected to surge 43.2% to ¥780 billion and profits are anticipated to jump 58% to ¥580 billion or ¥321.81 per share. The company expects higher revenues, favorable model mix, effective cost reduction measures, favorable currency effect and favorable impact of raw material cost fluctuations to contribute to the increase in profits during the year.

Dividend

Honda’s Board announced quarterly dividend of ¥20 per share to shareholders of record as of Sep 30, 2013. The company is expected to make annual dividend payment of ¥80 per share in fiscal 2014.

Our Take

Honda is a leading manufacturer of automobiles and the world’s largest manufacturer of motorcycles. It is the second largest automaker in Japan following Toyota Motor Corp. (TM - Analyst Report) and has global operations like another Japanese automaker Nissan Motor Co. Ltd. (NSANY). Currently, shares of Honda retain a Zacks Rank #2 (Buy).

Apart from Honda, Daimler AG (DDAIF) is worth a look in the same industry, with a Zacks Rank #1 (Strong Buy).

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