Honda Motor’s (HMC Quick QuoteHMC - Free Report) attractive products, with expanding lineup of electric vehicles, is likely to boost prospects. The collaboration with General Motors to develop two large-sized EV models will strengthen its e-mobility game. However, supply chain disruption, high R&D expenses and commodity and labor costs are likely to clip the margins.

Let us discuss the factor that highlight why investors should retain the stock.

Growth Indicators

Honda’s 2030 Vision, which emphasizes on electrified mobility products, bodes well. Its focus on providing attractive products by expanding the lineup of electric vehicles (EVs) in light of changing circumstances in the automobile industry is likely to boost prospects. Honda targets EVs to contribute 20% to its sales in Japan and 40% to its sales in North America and China by the decade end. The Honda Prologue SUV will be the first volume BEV for North America.  Honda plans to introduce 10 models in the next five years in its e:N series.

Honda has been undertaking frequent collaborations to expand business. For instance, the company’s joint venture with GAC Group and Dongfeng Motor Group will drive its EV prospects in China. Partnership with CATL will help establish a long-term stable procurement system in China and improve its competitiveness, thereby accelerating electrification strides. Honda’s collaboration with General Motors to develop two large-sized EV models will spur the Japanese auto giant’s e-mobility game. Honda's plan to launch more than 10 electric motorcycle models globally by 2025 and 3.5 million units by 2030 is praiseworthy.

As part of the global restructuring move, Honda has been undertaking steps to control costs and optimize production capacity. 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. Cost containment efforts are boosting the firm's financials. Honda has a manageable total debt to capital ratio of 0.40, lower than the industry’s 0.52.

Upbeat sales projections for fiscal 2024 spark optimism. For fiscal 2024, Honda forecasts revenues of ¥18.2 trillion, up 7.6% year over year. Pretax profit is forecast at ¥1,185 billion, up 26.3% year over year. To enhance its capital structure, the company decided to buy back shares up to 200 billion yen during the May 12, 2023 - May 31, 2024 period.

Concerns

High R&D expenses on advanced technologies and alternative fuels for the development of electric and autonomous vehicles bode well for the future but are likely to limit near-term margins and cash flows of the company. Macro-economic headwinds are also playing spoilsport. Supply chain disruptions, although easing gradually, are far from over. Further, high commodity, labor and freight costs along with logistical challenges may continue to limit margins.

Zacks Rank & Key Picks

HMC currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked players in the auto space are Geely Automobile Holdings Limited (GELYY Quick QuoteGELYY - Free Report) , BYD Company Limited (BYDDY Quick QuoteBYDDY - Free Report) and Wabash National (WNC Quick QuoteWNC - Free Report) , all of which sport a Zacks Rank #1.

Geely is engaged in automobile manufacturing and related areas. The Zacks Consensus Estimates for GELYY’s 2023 sales and earnings imply year-over-year growth of around 57.5% and 22.82%, respectively.

BYD is engaged in the research, development, manufacture and distribution of automobiles, secondary rechargeable batteries and mobile phone components. The Zacks Consensus Estimate for BYDDY’s 2023 sales implies year-over-year growth of around 209.6%.

Wabash is one of the leading manufacturers of semi-trailers in North America. The Zacks Consensus Estimate for WNC’s 2023 sales and earnings implies year-over-year growth of 12% and 19.7%, respectively.