Honda Motor Honda Motor CompanyCompany

Presented By: Zach BodinePresented By: Zach Bodine

March 9, 2006March 9, 2006

Stock FundamentalsStock Fundamentals

► PricePrice

► 52-Week High52-Week High

► 52-Week Low52-Week Low

► Average Volume (3 months)Average Volume (3 months)

► Market CapitalizationMarket Capitalization

$29.54$29.54

$30.36$30.36

$23.75$23.75

539,598539,598

$55.55 Bil$55.55 Bil

Investment RecommendationInvestment Recommendation

Buy/HoldBuy/Hold

Key RatiosKey Ratios

Ratios (all per share)Ratios (all per share)► P/E RatioP/E Ratio► EarningsEarnings► Dividend and YieldDividend and YieldFinancial Strength RatiosFinancial Strength Ratios► Quick Quick ► Current Current ► Long-Term D/ELong-Term D/E► Total Debt to EquityTotal Debt to Equity► Return on Equity (per share)Return on Equity (per share)► Return on AssetsReturn on Assets

13.4613.46$2.19$2.190.34 (1.10%)0.34 (1.10%)

0.840.841.131.13

0.8390.83913.52%13.52%5.03%5.03%

Growth PercentagesGrowth Percentages► Over the past 5 Over the past 5

YearsYears

RevenueRevenue Dividend Per ShareDividend Per Share

Earnings Per ShareEarnings Per Share

Operating IncomeOperating Income

7.2%7.2%

19.42%19.42%

14.1%14.1%

8.2%8.2%

Company DescriptionCompany Description

Automotive Automotive Manufacturers – MajorManufacturers – Major

1.1. AutomobilesAutomobiles

2.2. MotorcyclesMotorcycles

3.3. Power ProductsPower Products

4.4. Financial ServicesFinancial Services

HMC Sales Allocation Over the Past 9 Months

12%

81%

3% 4%

Motorcycles

Automobiles

Financial Services

Power Products

► Honda is the World’s Largest motorcycle manufacturer Honda is the World’s Largest motorcycle manufacturer but is most known for its automotive industrybut is most known for its automotive industry

Global PositionGlobal Position► Over 9 month spanOver 9 month span► Honda generated 59% of its Honda generated 59% of its

automobile profit from the North automobile profit from the North America alone, which was an America alone, which was an increase of 2.5% from a year ago.increase of 2.5% from a year ago.

► However, Asia led in Motorcycle sales However, Asia led in Motorcycle sales with 27.5%, while N.A. had 25.5%. with 27.5%, while N.A. had 25.5%. This was opposite of a year ago.This was opposite of a year ago.

HMC Sales Allocation Across Countries (last reported 9 mo.)

18%

54%

10%

11%

7%

Japan

North America

Europe

Asia

Other Regions

► Sales for the last 9 months Sales for the last 9 months ended Dec 30, 2005 totaled ended Dec 30, 2005 totaled $60.9B, and Sales for all of $60.9B, and Sales for all of 2005 totaled $80.5B2005 totaled $80.5B. .

Automobile BusinessAutomobile Business   

9 months ended 9 months ended Dec. 30, 2005Dec. 30, 2005

Sales Sales Make upMake up

% change from % change from previous yearprevious year

JapanJapan 18.50%18.50% -2.70%-2.70%

North AmericaNorth America 58.90%58.90% 2.40%2.40%

EuropeEurope 8.40%8.40% 0.30%0.30%

AsiaAsia 9.30%9.30% -0.30%-0.30%

Other RegionsOther Regions 4.60%4.60% 0.30%0.30%

Honda’s Automobile BrandsHonda’s Automobile Brands

► Honda’s principal Honda’s principal automobile products automobile products include passenger cars include passenger cars under:under:

► Legend, Accord, Civic, Legend, Accord, Civic,

City, Fit Saloon, Acura City, Fit Saloon, Acura RL, Acura TL, and RL, Acura TL, and Acura TSX brandsAcura TSX brands

► Multiwagons, Minivans, Multiwagons, Minivans, Sport utility vehicle, Sport utility vehicle, and Sports coupe and Sports coupe under:under:

► Elysion, Odyssey, Step Elysion, Odyssey, Step Wagon, Edix, FR-V, Wagon, Edix, FR-V, Stream, Fit, Jazz, Pilot, Stream, Fit, Jazz, Pilot, Element, CR-V, Acura Element, CR-V, Acura MDX, and Acura RSX MDX, and Acura RSX brandsbrands

Consumer Reports Top Automobile picks forConsumer Reports Top Automobile picks for 20062006

► Top Small Sedan (less than $20gs)Top Small Sedan (less than $20gs)► Top Family Sedan ($20-$30gs)Top Family Sedan ($20-$30gs)► Top Upscale Sedan ($30-40gs)Top Upscale Sedan ($30-40gs)► Luxury SedanLuxury Sedan► SUV ($30gs and more)SUV ($30gs and more)► Small SUV (less than $30gs)Small SUV (less than $30gs)► Top MinivanTop Minivan► Top Pick-up TruckTop Pick-up Truck► Green Car Green Car ► Fun to driveFun to drive

Honda CivicHonda Civic

Honda AccordHonda Accord

Acura TL (Honda)Acura TL (Honda)

Infiniti M35 (Nissan)Infiniti M35 (Nissan)

Toyota Highlander Toyota Highlander HybridHybrid

Subaru ForesterSubaru Forester

Honda OdysseyHonda Odyssey

Honda RidgelineHonda Ridgeline

Toyota PriusToyota Prius

Subaru ImprezzaSubaru Imprezza► Additionally, Honda was 2Additionally, Honda was 2ndnd overall in vehicle reliability right behind Lexus overall in vehicle reliability right behind Lexus

Marketing/TechnologyMarketing/Technology

► The new ACE System The new ACE System (Advanced Compatibility (Advanced Compatibility Engineering)Engineering)

► 5 star rating5 star rating► Hybrid EnginesHybrid Engines► ASIMOASIMO► Jet Engines ManufacturingJet Engines Manufacturing► NattokinaseNattokinase

Research and DevelopmentResearch and Development

► Honda currently has individualized R&D facilities in Honda currently has individualized R&D facilities in Japan for motorcycles, automobiles, and power Japan for motorcycles, automobiles, and power products, and a motorcycle R&D center in China for products, and a motorcycle R&D center in China for its increasing market demand. its increasing market demand.

► HRI (the Honda Research Institute) is located in HRI (the Honda Research Institute) is located in Japan, U.S., and Germany. Japan, U.S., and Germany.

- Research focus on: robotics technology, automotive - Research focus on: robotics technology, automotive safety, ultra lightweight products, and safety, ultra lightweight products, and

fuel cell technologyfuel cell technology - Deriving automotive fuel from plants.- Deriving automotive fuel from plants.

► Honda also has networked facilities in the UK, Honda also has networked facilities in the UK, Germany and Italy (to help focus on the European Germany and Italy (to help focus on the European market more independently)market more independently)

Management StructureManagement Structure

► President and President and Representative DirectorRepresentative Director

Takeo FukuiTakeo Fukui

Age: 62Age: 62

► Executive Vice-President Executive Vice-President and Representative and Representative DirectorDirector

Satoshi AokiSatoshi Aoki

Age: 60Age: 60

► Promotion of Objective Management:Promotion of Objective Management: Staff composed of 22 personnel. Two director positions and one Staff composed of 22 personnel. Two director positions and one auditor assigned annually outside the company.auditor assigned annually outside the company.

Temporary directors are paid according to how well the Company Temporary directors are paid according to how well the Company performs during their tenor. performs during their tenor.

ImageImage

►New Jersey Supreme Court: Honda sued New Jersey Supreme Court: Honda sued for engine failure by a leasee. for engine failure by a leasee. Magnussen Warranty ActMagnussen Warranty Act Engine failure occurred @ 22,000 milesEngine failure occurred @ 22,000 miles Losing company must cover all legal feesLosing company must cover all legal fees AAM supports HondaAAM supports Honda

►Clean- Fuel tax deduction (2005)Clean- Fuel tax deduction (2005)►Tax breaks under new energy bill Tax breaks under new energy bill

(2006)(2006)

Competitive AnalysisCompetitive Analysis   HMCHMC FF GMGM TMTM IndustryIndustry

Market Cap:Market Cap: 53.25B53.25B 14.06B14.06B 10.86B10.86B 171.94B171.94B 53.25B53.25B

Employees:Employees: 137,827137,827 300,000300,000 327,000327,000 265,753265,753 300.00K300.00K

Qtrly Rev Growth (yoy):Qtrly Rev Growth (yoy): 15.80%15.80% 3.60%3.60% -1.20%-1.20% 14.80%14.80% 5.60%5.60%

5 year Sales Growth5 year Sales Growth 9.74%9.74% 1.06%1.06% 1.34%1.34% 11.12%11.12% N/AN/A

Revenue (ttm):Revenue (ttm): 81.00B81.00B 177.09B177.09B 192.60B192.60B 173.35B173.35B 177.09B177.09B

Gross Margin (ttm):Gross Margin (ttm): 29.58%29.58% 8.21%8.21% 1.53%1.53% 18.27%18.27% 18.27%18.27%

EBITDA (ttm):EBITDA (ttm): 8.64B8.64B 16.10B16.10B 5.82B5.82B 24.35B24.35B 16.10B16.10B

Oper Margins (ttm):Oper Margins (ttm): 7.09%7.09% 1.00%1.00% -5.34%-5.34% 8.30%8.30% 7.89%7.89%

Net Income (ttm):Net Income (ttm): 4.05B4.05B 2.23B2.23B -8.45B-8.45B 10.82B10.82B 3.37B3.37B

EPS (ttm):EPS (ttm): 2.192.19 1.0481.048 -15.14-15.14 6.616.61 2.192.19

P/E (ttm):P/E (ttm): 13.2213.22 7.227.22 N/AN/A 15.9915.99 15.9915.99

PEG (5 yr expected):PEG (5 yr expected): 2.062.06 2.072.07 N/AN/A 2.92.9 2.072.07

P/S (ttm):P/S (ttm): 0.670.67 0.080.08 0.060.06 11 0.660.66

ROEROE 14.10%14.10% 15.70%15.70% -13.00%-13.00% 12.70%12.70% N/AN/A

ROAROA 5.10%5.10% 0.80%0.80% -0.70%-0.70% 4.70%4.70% N/AN/A

Dividend YieldDividend Yield 1.12%1.12% 5.23%5.23% 11.09%11.09% 1.20%1.20% N/AN/A

Industry TrendsIndustry Trends Trend of Companies performing well in foreign markets, Trend of Companies performing well in foreign markets,

but not domestically.but not domestically. GM: Dealing with Health care problems ($100B annually)GM: Dealing with Health care problems ($100B annually)

► Sold GMAC Subsid.Sold GMAC Subsid.► Possibility of bankruptcy in the futurePossibility of bankruptcy in the future

Ford: $1.6B decline in car sales from years ending 04’ – 05’ Ford: $1.6B decline in car sales from years ending 04’ – 05’ ► Sold Hertz rentl car businessSold Hertz rentl car business

Chrysler: Changes management aroundChrysler: Changes management around► Only U.S. manufacturer not in the redOnly U.S. manufacturer not in the red

Volkswagen: high prices, low quality, plus labor force Volkswagen: high prices, low quality, plus labor force issuesissues

Toyota and Honda are prospering well in U.S. marketToyota and Honda are prospering well in U.S. market

Everyone looks to China for expansionEveryone looks to China for expansion

Market PerformanceMarket PerformanceOne Year Price Performance Compared to the S&P 500One Year Price Performance Compared to the S&P 500

Market PerformanceMarket Performance5 year Price Performance Compared to the S&P 5005 year Price Performance Compared to the S&P 500

Common Size FinancialsCommon Size FinancialsIncome Statement

Revenue (ttm): 81.00B

Revenue Per Share (ttm): 43.86

Qtrly Revenue Growth (yoy): 15.80%

Gross Profit (ttm): 24.29B

EBITDA (ttm): 8.64B

Net Income Avl to Common (ttm): 4.05B

Diluted EPS (ttm): 2.19

Qtrly Earnings Growth (yoy): -11.70%

 

Balance Sheet

Total Cash (mrq): 5.27B

Total Cash Per Share (mrq): 2.865

Total Debt (mrq): 27.54B

Total Debt/Equity (mrq): 0.839

Current Ratio (mrq): 1.128

Book Value Per Share (mrq): 17.82

 

Cash Flow Statement

Operating Cash Flow (ttm): 5.18B

Levered Free Cash Flow (ttm): 1.25B

Valuation Data For Return on Valuation Data For Return on EquityEquity

Beta = .46 Beta = .46

Risk Free Rate = .486 Risk Free Rate = .486

Avg. Market Risk = 11%Avg. Market Risk = 11%

Re = Rf + B(Equity Risk Premium)

Re = .0486+.46(.11-.0486) = 7.68%

Valuation of Stock PriceValuation of Stock Price

► Intrinsic Value based on Future Cash FlowsIntrinsic Value based on Future Cash Flows

► Conservative Growth rateConservative Growth rate

Normal GrowthRe= 7.68%

Owner earnings= $3.14BGrowth rate = 4%

Second Stage Growth rate = 2.5%

Estimated Intrinsic Value= $39.11

Valuation continuedValuation continued

Diminishing GrowthDiminishing Growth► Using revenue growth of 14.3% from 2003-2004, Using revenue growth of 14.3% from 2003-2004,

and 6% from 2004-2005, you could project that and 6% from 2004-2005, you could project that revenue growth from 2005-2006 could be equal to:revenue growth from 2005-2006 could be equal to:

► 6/14.3=.41966/14.3=.4196► .4196*6= 2.52% (new assumed growth rate).4196*6= 2.52% (new assumed growth rate)► Leaving all other variables the sameLeaving all other variables the same► Estimated Intrinsic Value = Estimated Intrinsic Value = $34.84$34.84

Valuation continued…..Valuation continued…..

► Impressive growthImpressive growth► By Viewing the table which displays sales in yen By Viewing the table which displays sales in yen

over the 9 months ended 12/31/2004, and then over the 9 months ended 12/31/2004, and then looking at the sales in yen for the 9 months ended looking at the sales in yen for the 9 months ended 12/31/2005 you get the following numbers12/31/2005 you get the following numbers

► 2004 sales = 63005512004 sales = 6300551► 2005 sales =70742552005 sales =7074255► Growth rate= 7074255/6300551= 12.2%Growth rate= 7074255/6300551= 12.2%► Adjusted to 10%Adjusted to 10%► Estimated Intrinsic Value = $62.50Estimated Intrinsic Value = $62.50

Analysts Ratings Analysts Ratings finance.yahoo.comfinance.yahoo.com

RECOMMENDATION SUMMARYRECOMMENDATION SUMMARY**   

     

Mean Recommendation (this week):Mean Recommendation (this week): 1.31.3

Mean Recommendation (last week):Mean Recommendation (last week): 1.31.3

Change:Change: 00

Industry Mean: Industry Mean:   N/AN/A

Sector Mean:Sector Mean: N/A N/A 

S&P 500 Mean:S&P 500 Mean: 2.462.46

  CurrenCurren

t t 1 Month 1 Month

AgoAgo3 Months 3 Months

AgoAgo

Strong BuyStrong Buy 22 22 22

Moderate Moderate BuyBuy 11 11 11

HoldHold 00 00 00

Moderate Moderate HoldHold 00 00 00

SellSell 00 00 00

Pros and ConsPros and Cons

► Pros:Pros: ► Fuel/ cost efficient products and technologyFuel/ cost efficient products and technology► Extensive R&D programs Extensive R&D programs ► Superior TechnologySuperior Technology► Moving towards differentiated product linesMoving towards differentiated product lines► One of the few currently profiting companies in its industryOne of the few currently profiting companies in its industry► Objective Management StructureObjective Management Structure► Continuous increase in automotive sales in North America, Continuous increase in automotive sales in North America,

particularly U.S., and in Europe as well.particularly U.S., and in Europe as well.

► Cons:Cons: ► Fluctuation of Exchange rates, makes for inconsistent earningsFluctuation of Exchange rates, makes for inconsistent earnings► Japan’s EconomyJapan’s Economy► Automotive industry very susceptible to interest ratesAutomotive industry very susceptible to interest rates► Toyota may be a better buyToyota may be a better buy

QuestionsQuestions

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