Unlike American Rivals, Honda’s Quarterly Results Fail to Impress

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The Big Three American automakers have all reported earnings for the last quarter, and, in general, their results showed the U.S. auto industry is on a rampage. Economists may be worried about American consumers primarily keeping purchases to their immediate needs, but consumer appetite for new vehicles has been strong in recent months, and Americans are now buying cars and trucks at a pace not seen since before the recession.

But Honda (NYSE:HMC), the third-largest Japanese automaker, on Wednesday announced a lower-than-expected increase in quarterly operating profit. With sales down in Japan thanks to the end of green vehicle subsidies and U.S. sales of profitable sport utility vehicles and pickup trucks hindered by competition from the American automakers, the company reported that first quarter operating profit rose a modest 5.1 percent to 185.0 billion yen, or $1.9 billion, in the first quarter from 176.01 billion yen a year earlier.

Profit was also held back by “an increase in expenses necessary for the future growth of the company,” Honda said in a press release. These expenses included research and development investments and costs related to the startup of new production plants.

Unimpressive sales of its more profitable vehicles and the company’s hefty expenses largely offset the benefits created by the weaker yen and an increase of vehicle sales in the United States.

Net profit fell 7 percent to 122.5 billion yen, or $1.2 billion, from 131.7 billion yen in year-ago quarter. Comparatively, analysts had expected Honda to generate 138.59 billion yen in profit. Revenue rose 16 percent to 2.834 trillion yen, or $28.75 billion.

In the United States, where Honda is the fifth-largest automaker, the company sold 745,578 vehicles in the first half of the year, an increase of 6 percent from the first half of 2012. Strong sales of the popular Accord helped fuel the increase. Still, Honda’s market share in the U.S. shrunk 0.1 percentage points to 9.5 percent in the first half of the year, a problem for the automaker, as the U.S. is Honda’s largest market and accounts for approximately 40 percent of its global sales.

Car sales in Japan, the automaker’s second-largest market, declined 24 percent in the first quarter to 140,000 vehicles, in part because government subsidies for green vehicles came to an end late last year.

Honda’s expansion plans hovered below the surface of its earnings report. The company has an aggressive sales target: by building several new factories and expanding capacity in existing plants, the automaker plans to expand global annual sales from the current 4 million to 6 million by March 2017.

Honda’s Yorii plant in Japan began production earlier in July, a factory in Mexico is scheduled to open in 2014, and multiple expansions and new construction projects at locations in Thailand and China are on the drawing board. In fact, capital expenditures in the first quarter rose 78.6 percent year-over-year, to 171 billion yen.

“At times, we see various big unexpected moves in emerging markets, so we are cautious,” Executive Vice President Tetsuo Iwamura said at a news conference held after earnings were released, according Reuters. “But automobile and motorbike demand will certainly grow there, so we will continue to build foundations for success.”

Despite the less-than-stellar results, Honda kept its forecast for the full year unchanged because the company believes that soon-to-be-released compact cars and SUVs will help global sales. Still, shares were trading slightly down from Tuesday’s close of $37.42 after the first quarter report was released.

Toyota (NYSE:TM), the largest Japanese automaker, will report earnings Friday. Last week Japan’s second-largest carmaker, Nissan (NSANY.PK), announced that operating profit jumped 23 percent from a year ago.

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