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What Factors Could Affect Honda’s Valuation Multiples?

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Jun. 22 2016, Updated 10:04 a.m. ET

Factors affecting Honda’s valuation

Previously in this series, we looked at valuation methods for Honda Motor Company (HMC). It’s also important for investors to understand that valuation multiples can change based on multiple internal and external risk factors. We’ll discuss these factors for Honda in this final article of the series.

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Risk factors

As noted earlier in this series, Honda is a mature company, so it’s important for investors to pay attention to factors that may increase the company’s risk profile significantly. This is unlike fairly new businesses such as Tesla (TSLA), where future earnings estimates are primarily driven by future growth prospects rather than the company’s risk profile.

In Honda’s case, a number of risk factors may affect its future earnings estimates and could negatively affect its valuation multiples going forward.

Unfavorable currency fluctuation

In fiscal 2016,[1. April 1, 2015–March 31, 2016] Honda was able to post higher Japanese yen revenues and expanded margins. Here, the depreciation of the yen played a key positive role. But for fiscal 2017, the prospects don’t seem as favorable for Japanese companies such as Honda and Toyota (TM).

Investors should keep an eye on the yen’s movement in the coming quarters, especially against the US dollar and the euro. Any sharp appreciation of the yen against these two currencies would hurt Honda’s profitability, which may lower its future earnings growth forecast. It could also drive the company’s valuation multiples lower.

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Worsening home market

Currently, the US and China are the two largest markets for Honda. In recent years, the company’s performance in both of these markets has been strong.

Japan, which is Honda’s home market, is also a strategically important market for the company. Since fiscal 2010, Honda’s revenues from its home market have inched up by just 11.2%. Continued weak performance in Japan would increase the company’s risk profile and drive its valuation multiple lower.

The pressure on Honda to perform better in its home market also increases at a time when its overseas revenues are likely to fall due to the strengthening Japanese yen.

Additionally, the company has significant exposure to the US market. Thus, any possible downturn in auto demand in the US going forward may also negatively affect Honda’s future earnings growth prospects and its valuation. However, the negative effect of a downturn in US auto sales should be higher on mainstream US automakers (VCR), including General Motors (GM) and Ford (F).

Auto investors can read about other mainstream automakers in the following company overview series:

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