Honda Motors Focuses on Hybrids
Honda Motor Company (HMC) is expanding its business in Asia, growing its global network to increase efficiency and introducing new products to satisfy local markets. Further, capacity expansion plans in Asia and a new sales strategy in Japan inspire optimism about Honda's future prospects.
However, rising raw material prices and selling & administrative expenses are likely to pressure margins. Moreover, unfavorable currency exchange rates, flat-to-lower sales in its key markets (North America) and increased competition will threaten HMC's global competitive position. Therefore, we maintain our Hold rating with a six-month target price of $35.50. This is 13.1x our 2009 EPADR estimate.
By 2010, Honda expects global automobile sales to reach 5 million units. The company expects to sell at least 18 million motorcycles and more than 7 million units of power products in 2010. Honda is planning the introduction and/or production of a number of products that would improve market share and profitability.
To improve the fuel efficiency of its U.S. model, the company plans to launch a new gas-electric hybrid engine as well as diesel-powered versions of its larger vehicles. To boost sales of hybrid cars globally, HMC plans to roll out cut-rate model cars costing 200,000 yen more than their gas-powered counterparts. It recently launched its first hybrid car -- the Civic Hybrid -- in India. The company expects hybrid car sales to increase from 400,000 to 500,000 units a year by 2010. The company plans to develop compact hybrid cars and launch these in 2010.
Currently, ADRs of Honda are trading at 12.3x our 2009 EPADR estimate of $2.70. We believe the Honda stock has significant upside, given HMC's technological leadership and global production capabilities.
Expect Margin Pressure for NVIDIA
Product-related issues for NVIDIA (NVDA) such as the transition from the G80 to G92 series and the recently discovered failure of certain notebook products will pressure gross margins, which we believe will continue for few quarters. We therefore maintain a Hold rating on the shares.
To remain competitive, NVIDIA has invested heavily in research and development, which increased 25.0% in fiscal 2008 and 38.2% in the first quarter of fiscal 2009, and may require more investment, which could further dampen margins. In addition, NVIDIA faces risks associated with international operations as nearly 92% of fiscal 2008 revenue has been from businesses outside the U.S.
Shares of NVIDIA are currently trading at 11.3x our reduced fiscal 2009 EPS estimate of $1.11. We lower our estimates for the second quarter and full fiscal year 2009 and 2010.
