Can Honda Get Past a Recent Slump?

With shares of Honda Motor (NYSE:HMC) trading around $38, is HMC an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Honda Motor develops, produces, and manufactures a variety of motor products ranging from small general-purpose engines and scooters to specialty sports cars. The company’s business segments are the motorcycle business, automobile business, financial services business, and power product and other businesses. Honda conducts its operations in Japan and worldwide, including North America, Europe and Asia.

Honda Motor said recently that sales in China are down 2.5 percent in August versus a year ago, according to a report from Reuters. Honda’s sales in China have been down all year. Sales in the country fell 5.6 percent year-over-year in June and 1.7 percent in July. During the first eight months of the year, Honda’s sales in China were down 2.9 percent with the Japanese automaker selling 423,271 vehicles there through August.

T = Technicals on the Stock Chart Are Mixed

Honda Motor stock been moving sideways over the last few years. The stock is now trading near mid-prices for the year so it may need a bit of time here. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Honda Motor is trading between its key averages which signal neutral price action in the near-term.

HMC

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Honda Motor options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Honda Motor Options

28.48%

40%

38%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Honda Motor’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Honda Motor look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-25.10%

-7.58%

45.84%

34.21%

Revenue Growth (Y-O-Y)

-6.29%

-0.31%

12.10%

18.78%

Earnings Reaction

-0.74%

N/A

N/A

N/A

Honda has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have not been pleased with Honda Motor’s recent earnings announcement.

P = Weak Relative Performance Versus Peers and Sector

How has Honda Motor stock done relative to its peers General Motors (NYSE:GM), Toyota Motor (NYSE:TM), Ford Motor (NYSE:F), and sector?

Honda Motor

General Motors

Toyota Motor

Ford Motor

Sector

Year-to-Date Return

3.28%

26.78%

35.39%

32.70%

28.62%

Honda Motor has been a poor relative performer, year-to-date.

Conclusion

Honda provides vehicles and related products to consumers and companies around the world. The company has been hurting lately as demand in China has been declining for most of the year. The stock has not done too well in recent years and is now trading at mid prices for the year. Over the last four quarters, earnings and revenues have been mixed which have not pleased investors. Relative to its peers and sector, Honda has been a weak year-to-date performer. WAIT AND SEE what Honda does this coming quarter.

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