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Honda Motor Co., Ltd. HMC, a leading manufacturer of automobiles and the largest producer of motorcycles in the world, has been struggling with declining revenues in the Power Products segment due to reduced demand across most markets, high R&D expenses and rising debt levels.
Let us see why you should consider offloading this Zacks Rank #4 (Sell) stock from your portfolio.
Power Products Segment, High Expenses to Ail Honda
Honda's Power Products segment has been struggling with declining revenues due to reduced demand across most markets. In fiscal 2024, segment revenues fell as unit sales dropped 32.5% to 3,812,000 units. This downward trend is expected to continue, with unit sales anticipated to decrease an additional 4% to 3,660,000 units in fiscal 2025.
High R&D expenses on advanced technologies and alternative fuels for the development of electric and autonomous vehicles bode well for the future but are likely to limit the near-term margins. For fiscal 2025, R&D costs are expected at ¥1.2 trillion, implying an uptick from ¥976 billion recorded in fiscal 2024. Capital expenditure for fiscal 2025 is expected to jump 54.7% to ¥600 billion. Notably, Honda is investing $65 billion (¥10 trillion) over the ten-year period through 2030. While such massive spending might boost long-term prospects, near term cash flows could be under pressure.
Honda's profits are adversely affected by the unfavorable currency effects. In the first nine months of fiscal 2025, the currency effects negatively affected operating profit by ¥56.3 billion. In fiscal 2025, the currency effects are likely to hit operating profit by ¥100.5 billion.
The company’s rising debt levels are concerning. Long-term debt was around ¥6.76 trillion as of Dec. 31, 2024, up from ¥6.05 trillion as of March 31, 2024. While the long-term debt to capital ratio is manageable at 0.33, the figure is higher than the industry’s 0.27.
Stocks to Consider
Some better-ranked stocks in the auto space are Geely Automobile Holdings Limited GELYY, Dana Incorporated DAN and Strattec Security Corporation STRT, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for GELYY’s fiscal 2025 sales and earnings indicates year-over-year growth of 66.62% and 149.31%, respectively. EPS estimates for fiscal 2025 and 2026 have improved 15 cents and 38 cents, respectively, in the past 60 days.
The Zacks Consensus Estimate for DAN’s 2025 earnings implies year-over-year growth of 70.21%. EPS estimates for 2025 and 2026 have improved 10 cents each in the past seven days.
The Zacks Consensus Estimate for STRT’s 2025 sales indicates year-over-year growth of 2.61%. EPS estimates for 2025 and 2026 have improved 91 cents and $1.06, respectively, in the past 30 days.