Honda Motors Focuses on Hybrids

Honda Motor Company (HMC - Analyst Report) is expanding its business in Asia, growing its global network to increase efficiency and introducing new products to satisfy local markets. Further, capacity expansion plans in Asia and a new sales strategy in Japan inspire optimism about Honda's future prospects.

However, rising raw material prices and selling & administrative expenses are likely to pressure margins. Moreover, unfavorable currency exchange rates, flat-to-lower sales in its key markets (North America) and increased competition will threaten HMC's global competitive position. Therefore, we maintain our Hold rating with a six-month target price of $35.50. This is 13.1x our 2009 EPADR estimate.

By 2010, Honda expects global automobile sales to reach 5 million units. The company expects to sell at least 18 million motorcycles and more than 7 million units of power products in 2010. Honda is planning the introduction and/or production of a number of products that would improve market share and profitability.

To improve the fuel efficiency of its U.S. model, the company plans to launch a new gas-electric hybrid engine as well as diesel-powered versions of its larger vehicles. To boost sales of hybrid cars globally, HMC plans to roll out cut-rate model cars costing 200,000 yen more than their gas-powered counterparts. It recently launched its first hybrid car -- the Civic Hybrid -- in India. The company expects hybrid car sales to increase from 400,000 to 500,000 units a year by 2010. The company plans to develop compact hybrid cars and launch these in 2010.

Currently, ADRs of Honda are trading at 12.3x our 2009 EPADR estimate of $2.70. We believe the Honda stock has significant upside, given HMC's technological leadership and global production capabilities.

Read the full analyst report on HMC