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Morningstar | Honda Raises Guidance Following Fiscal Second-Quarter Results

We are not changing our Honda fair value estimate after the company reported second-quarter fiscal 2019 results. Honda had a good quarter with an easy year-over-year comparable due to a Takata airbag legal settlement charge of JPY 53.7 billion in the prior-year's quarter. Total company revenue increased 1.7% year over year mostly due to growth from motorcycles and the captive finance arm. Automotive segment revenue declined by 0.9%. Motorcycles volume including joint ventures grew 1.5% to 5.3 million units, which helped the segment's operating margins rise by 240 basis points to 15.8%.

Total company operating profit faced a JPY 36.7 billion headwind from foreign exchange, mostly the dollar against various currencies other than the yen. Improved revenue and mix along with cost cuts enabled the firm to grow operating income by 3.8% excluding the Takata charge. The company also increased its fiscal 2019 profit and dividend guidance with the latter now at JPY 111 per share versus JPY 108 in the first quarter release. Fiscal 2019 profit guidance increases came from better revenue and mix expectations than prior guidance as well as from more benefits from cost-cutting and less foreign exchange headwinds. The latter is partially from management's expectations of a weaker yen against the dollar than previously expected for fiscal 2019, with its expected rate now averaging JPY 110 compared with JPY 107. More guidance increases could come given the actual spot rate is about 113.

The automotive segment operating margin excluding the settlement declined 80 basis points to 2.6%. Honda's light truck offerings are more sparse than American automakers' because it does not sell full-size SUVs or full-size pickups. The current generation of the CR-V crossover is quite new (2017 model year), and more light truck support is on the way. According to management, the flooded Mexican plant making the HR-V subcompact crossover will resume full production in mid-November.

The Honda brand's 2019 U.S. product cadence is thin with just the midsize Passport crossover launching, so that and a freshened Pilot will need to carry the brand to 2020. Acura, however, gets three new generation vehicles in the U.S. market in the back half of calendar 2019, the MDX crossover and the TLX and RLX sedans.