Honda Motor: Cheap Valuation Ahead Of Earnings, Bullish Technical Developments

Asia-Pacific equities are off to their best start in at least 19 years. The Vanguard Pacific Stock Index Fund ETF (VPL) is higher by more than 7% in 2023, matching the return of the S&P 500. A lower dollar and recovering economic growth outlooks in the region are tailwinds.

One Japan-domiciled Consumer Discretionary name has done a U-turn lately, moving from a bearish to bullish trend. Is there more upside left in Honda Motor (NYSE:HMC)? Let’s check it out.

Asia-Pac Stocks: Best Start to a Year in VPL’s History

According to Bank of America Global Research, Honda Motor is Japan’s third-largest automaker in terms of sales. HMC has a strong share of the global motorcycle business as well. North America is a main earnings source, with autos historically highly regarded in the US market. Honda has the highest exposure to the North American business of Japan’s big three (Toyota, Nissan, Honda), though it is slightly lagging in emerging market expansion. Recently, Honda has been aggressive in emerging markets also for improved growth.

The Tokyo-based $43.0 billion market cap Automobiles industry company within the Consumer Discretionary sector trades at a low 8.0 trailing 12-month GAAP price-to-earnings ratio and pays a 3.1% dividend yield, according to The Wall Street Journal.

I like that the firm reported strong double-digit sales growth in January, and we will get a fresh look at its quarter-ending December on Friday. Another growth catalyst could come via the company’s investments in hydrogen power and a collaboration with GS Yuasa to provide lithium-ion batteries for EVs. I see earnings growth potential, but there are ongoing supply chain issues and geopolitical tensions in Asia that could be headwinds. Honda’s strong balance sheet should help it weather turmoil, though. The motorcycle segment’s upside is a bullish catalyst as well.

On valuation, analysts at BofA see 2023 earnings as about flat compared to per-share profits in 2022, but growth begins to accelerate later this year through 2025. Dividends, meanwhile, are forecast to rise at a steadier rate which is a plus compared to many ex-US firms’ variable payout policies.

With very positive free cash flow, the dividend should be quite reliable while Honda’s P/E is attractive under 10. The FCF multiple of just 3 is quite remarkable and the firm trades at a low P/B and EV/EBITDA. Overall, I like the profitability and valuation. Shares could rise 30% just to match its 5-year average forward EV/EBITDA ratio.

Honda Motor: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q3 2023 earnings date of Friday, February 10 BMO with a conference call immediately after results hit the tape in the overnight Thursday into Friday NYC time. You can listen live here. Monthly interim sales data will also be reported this month (Feb 24) before the May quarterly report. I expect volatility to spike in advance of Friday’s Q3 results.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) does not show a consensus EPS forecast (nor does Seeking Alpha). CFRA, however, reports a consensus 2023 earnings per ADS of JPY453 which would be a 10.2% rise from Honda’s FY2022. ORATS data show that the firm has missed analysts’ earnings estimates in the previous two quarters while the stock rarely moves more than a few percent up or down the day after reporting.

Currently, the at-the-money straddle expiring soonest after Friday’s earnings date reveals a 3.7% expected per-share swing. That’s about what I would expect for Honda, so I am inclined to bypass the options and focus on shares into and after earnings. With a decent valuation and fairly priced option premium, what does the chart say?

HMC: A Pair of Recent Earnings Misses, Muted Share Price Reactions

The Technical Take

HMC has broken its downtrend line that dated back to a high above $32 about a year ago. Notice in the chart below that shares are now retesting a move above the flattening 200-day moving average currently at $24.49. A strong start to 2023 is currently seeing some modest profit-taking, and I don’t like how Friday featured a significant volume spike. Holding $24 could be key. More broadly, HMC has put in a bullish rounded bottom pattern, and I see resistance in the $27 to $27.50 range. What is encouraging for the bulls is that the recent leg higher comes on a higher high in momentum RSI – confirming the price rally.

Overall, I see more bullish than bearish risk here, so a long play with a stop under $20 could work to avoid a near-term whipsaw around the 200-day moving average.

HMC: Bearish to Bullish Reversal, Watching the 200dma

The Bottom Line

I like both the fundamental valuation and technical momentum with Honda. With an earnings report ahead and EPS growth likely to return this year, a long position in this foreign stock is warranted.