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We have upgraded our long-term recommendation on Honda Motor Co. (HMC) to Outperform from Neutral. The automaker expects a revival in sales and profits in fiscal 2013, based on higher revenues, favorable model mix and effective cost reduction measures. The company also expects to benefit from stricter environment regulations given its long-term focus on hybrid vehicles.

Honda continues to focus on hybrid vehicles technology considering the government environmental regulations. To fullfill the demand of the consumer, the company is improving the fuel efficiency of its vehicles. In 2012, the company plans to launch plug in hybrid car models in Japan as well as in U.S. The several models based on existing hybrid technologies includes third generation of Honda Civic Hybrids subcompact car and a hybrid version of the B-segment Honda Fit subcompact car.

Honda expects to boost in sales in U.S. in the near future. The company plans to offer improved lineups, including revamped Civic and redesigned CR-V and Accord to the customers, which will enhance the sales of the company. It will build its new Acura NSX supercar in Ohio. This is expected to improve sales by more than 20% in 2012.

Honda anticipates that there would be a 30% growth in revenues to ¥10.3 trillion for fiscal 2012. Operating profit will be up 168% to ¥620 billion and profits are expected to surge 122% to ¥470 billion or ¥260.78 per share. The company believes higher revenues, favorable model mix and effective cost reduction measures will contribute to the increase in profits during the year.

However, appreciation of Japanese Yen against most of the foreign currencies will put pressure on the company. Further, it continues to face difficulties in obtaining parts from suppliers due to disasters in Japan as well as flooding in Thailand.

Honda witnessed significant improvement in profits of 61% to ¥71.6 billion ($871 million) in the fourth quarter of the fiscal 2012 ended March 31, 2012 from ¥44.6 billion in the same quarter of prior fiscal year. On a per share basis, profits were ¥39.72 ($0.48) in the quarter versus ¥24.72 in the prior year. However, it missed the Zacks Consensus Estimate of 62 cents per share.

Revenues escalated 9% to ¥2.4 trillion ($29.3 billion). The increase in revenues was driven by higher revenues from motorcycle and automobile businesses.

Honda Motor Company is a leading manufacturer of automobiles and the largest manufacturer of motorcycles in the world. The automaker is recognized internationally for its expertise and leadership in developing and manufacturing a wide variety of products that incorporate its efficient internal combustion engine technologies ranging from small general-purpose engines to specialty sports cars. It is the second largest automaker in Japan, following Toyota Motor Corp. (TM).

Our long-term recommendation is backed by Zacks #1 Rank on the stock, which translates into a short-term (1 to 3 months) Strong Buy rating.

 
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