Better Buy: Honda Motor Company vs. Ford

Honda Motor Co., Ltd. (HMC) and Ford Motor Company (F) are prominent global auto manufacturers. Based in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, and power products. It also sells spare parts and provides after-sales services directly through retail dealers, independent distributors, and licensees.

F designs, manufactures, markets, and services a range of trucks, cars, sport utility vehicles, electrified vehicles, Lincoln luxury vehicles, and related parts and accessories. It provides retail installment sale contracts for new and used vehicles and direct financing leases for new vehicles to retail and commercial customers.

Persisting issues like semiconductor chip shortage, raw materials shortage, high inflation, and rising interest rates have significantly affected the auto manufacturing industry lately. This has forced many companies to cut their production significantly.

However, the shifting focus of HMC and F on the fast-growing electric vehicle (EV) market, which is benefitting from government support, should drive their long-term growth and help them stay afloat in the near term.

Investors’ interest in this space is evident from the KraneShares Electric Vehicles and Future Mobility Index ETF’S (KARS) 3.2% gains over the past week.

F is a winner with 2.9% gains over the past week versus HMC’s 2% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On June 21, 2022, HMC’s China subsidiary Honda Motor (China) Investment Co., Ltd., announced that its automobile production and sales JV, GAC Honda Automobile Co., Ltd. (GAC Honda), began construction of a new EV plant.

With an initial investment of RMB3.49 billion ($521.81 million) and the adoption of advanced production technologies, this highly efficient, smart, and low-carbon EV plant will possess an annual production capacity of 120,000 units from 2024 onward.

On June 22, 2022, F’s Europe business chose its plant in Valencia, Spain, as the preferred site to assemble vehicles based on a next-generation EV architecture. Pending product approval, this plant could produce breakthrough electric and connected vehicles beginning later this decade.

F is also moving forward with a $2 billion conversion of its Cologne, Germany, operations to produce electric passenger vehicles starting in 2023. By 2026, Ford in Europe plans to sell 600,000 electric vehicles annually. These plans should help F expand its reach in the European EV market.

Recent Financial Results

For its fiscal 2022 fourth quarter ended March 31, 2022, HMC’s sales revenue increased 10.5% year-over-year to ¥3.88 trillion ($28.72 billion). The company’s operating profit came in at ¥199.59 billion ($1.48 billion), representing a 6.4% decline from the prior-year period.

Its net profit came in at ¥144.50 billion ($5.87 billion), down 35.4% from its year-ago period. HMC’s EPS came in at ¥73.02, indicating a 40.9% year-over-year decline. As of March 31, 2022, the company had ¥3.68 trillion ($27.24 billion) in cash and cash equivalents. 

For the fiscal 2022 first quarter ended March 31, 2022, F’s total revenues decreased 4.8% year-over-year to $34.48 billion. The company’s operating income came in at $1.34 billion for the quarter, increasing 45.5% from the prior-year period.

F’s adjusted earnings came in at $1.56 billion, down 45.5% from the year-ago period. Its adjusted EPS came in at $0.38, indicating a 45.8% year-over-year decline. As of March 31, 2022, the company had $20.54 billion in cash and cash equivalents.

Past and Expected Financial Performance

Over the past three years, HMC’s levered free cash flow and total assets have increased at CAGRs of 30.2% and 5.5%, respectively.

HMC’s EPS is expected to increase 2.6% year-over-year in fiscal 2023, ending March 31, 2023, and 47.6% in fiscal 2024. Its revenue is expected to grow 356.9% in fiscal 2023 and 7.6% in fiscal 2024.

Over the past three years, F’s levered free cash flow and total assets have declined at 1.9% and 1.3% CAGRs, respectively.

Analysts expect F’s EPS to increase 21.4% year-over-year in fiscal 2022, ending December 31, 2022, and 11.4% in fiscal 2023. Its revenue is expected to grow 14.9% year-over-year in fiscal 2022 and 10.1% in fiscal 2023.

Valuation

In terms of forward EV/EBITDA, F is currently trading at 9.83x, 28.7% higher than HMC’s 7.64x. In terms of forward EV/Sales, F’s 1.06x compares with HMC’s 0.62x.

Profitability

F’s trailing-12-month revenue is 1.1 times that of HMC’s. However, HMC is more profitable, with a 20.5% gross profit margin versus F’s 11.4%.

Furthermore, HMC’s levered free cash flow margin of 8.4% compares with F’s 3%.

POWR Ratings

While HMC has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, F has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

HMC has an A grade for Value, which is in sync with its lower-than-industry valuation ratios. HMC’s 0.62x forward EV/Sales is 40.9% lower than the 1.06x industry average. F’s B grade for Value reflects its relatively lower valuation. Its 1.06x forward EV/Sales is 0.8% lower than the 1.06x industry average.

HMC has a B grade for Stability, reflecting its lower volatility compared to broader markets. HMC has a 0.96 beta. F’s D grade for Stability is in sync with its higher volatility. F has a 1.15 beta.

Of the 65 stocks in the Auto & Vehicle Manufacturers industry, HMC is ranked #4, while F is ranked #28.

Beyond what we have stated above, our POWR Ratings system has graded F and HMC for Growth, Quality, Stability, and Momentum. Get all HMC ratings here. Also, click here to see the additional POWR Ratings for F.

The Winner

The increasing focus on the fast-growing EV market should help auto manufacturers HMC and F grow in the long run. However, relatively lower valuation and higher profitability make HMC a better buy here.

Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated Auto & Vehicle Manufacturers' stocks.

HMC shares were trading at $24.96 per share on Friday afternoon, up $0.12 (+0.48%). Year-to-date, HMC has declined -11.02%, versus a -17.93% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

More...