Pros and Cons to Buying Honda Motor Co Ltd (HMC) Stock

Honda Motor Co (NYSE: HMC) didn't start out as a car company, but it's sure come a long way from the early days, when it sold motorized bikes back in 1946.

Company founder Soichiro Honda did so well in the bike business he decided to expand his company, calling it the Honda Motor Co. when it rolled out in 1948.

Thirty-four years later, Honda was doing so well it became the first foreign car maker to build a vehicle in the U.S. (the Honda Accord), and has gone to sell cars, trucks, SUVs, motorcycles, ATVs, boats, mountain bikes and even solar powered cells.

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Now, although profits have edged upward in the years following the Great Recession, auto analysts expect global auto sales to decline in 2019 as the global economy slows.

Is it a good time to get under the hood and kick some tires on Honda stock?

Honda Stock at a Glance

Honda stock is selling at this writing at $26.51 with a one-year target price of $34. The share price is down from $36 in early January of 2018, and the year-long trading range has been fairly narrow, at $26 to $37 per share. Its market cap stands at $46.3 billion.

Financially, Honda was outsold by several of its key competitors in November, selling 120,1534 vehicles, compared to unit sales of 195,255 for Ford Motor Co. ( F), 248,740 by General Motors Co. ( GM) and 190,423 sales for Toyota Motor Co. ( TM).

Total monthly sales were down 9.5 percent from November 2017, and have fallen by 2.8 percent on a year-to-date basis.

Pros to Buying Honda Stock

Structurally, Honda has a good financial story to tell, as its fiscal second-quarter performance (ending Sept. 30) numbers were robust. Honda earnings per share beat analysts estimates by 11.6 percent and increased more than 45 percent from the company's fiscal first quarter, says Don Chung, an institutional trader at Hylink Ventures in Phoenix.

Overall, Honda is finishing its fiscal third quarter strong, says Chung, who lists HMS stock as a "buy."

"Their revenue has continued to increase each quarter in 2018," he says. "Honda has maintained its position as the second best Japanese carmaker in market capitalization. Honda also recently partnered with General Motors and invested in its subsidiary company, Cruise Automation, based in San Francisco, that's developing autopilot technology."

While the auto sector faces headwinds in 2019, according to analysts, the current vehicle market remains relatively robust, and Honda is a name that customers know and apparently trust.

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"The auto sector is faring very well right now," says Bryan Horne, general manager of Harrisonburg Honda, near Richmond, Virginia. "Although Honda sales in the U.S. market are slightly down over our record 2017, relatively speaking, the Honda product is still a dominant name in most U.S. markets."

Horne notes that Honda is "aggressively pursuing" the Chinese market, a move that should benefit Honda investors in the long run.

"That should offset any dip in the U.S. market, which would positively affect the strength of the stock," he says. "In fact, I am a buyer of Honda stock because of the aggressive pursuit of Chinese market share. Although U.S. sales may be flat or slightly down, the financials of the company are strong."

Cons to Buying Honda Stock

Other vibes coming out of the auto sector right now aren't as positive, and that negative sentiment may be enough to keep skittish stock buyers on the sideline. "Auto sales are clearly showing signs of a slowdown for the first time since the global financial crisis," says Jay Srivatsa, chief executive officer at Future Wealth in Los Gatos, California.

In the last eight years, car sales have grown by an average of 5 percent per year, but in 2018 that rate is expected to slow to a mere 1.8 percent, Srivatsa says.

"The slowdown has largely been attributed the shift to global uncertainty over President (Donald) Trump's trade policies, which are raising prices on raw materials, and creating new barriers to the import and export of vehicles," he says.

The biggest issues going forward for Honda are massive amounts of investment in research and development for electrification and autonomy, experts say.

"But everyone is doing that, so it won't help with market share," says Michael Tanney, co-founder and managing director of New York-based Wanderlust Wealth Management. "The electrification makes cars last longer so that will eventually hurt sales, and autonomy means more vehicle sharing, and fewer people owning cars altogether."

Technology and eco-friendly vehicles will trigger other impacts in the auto industry, as well, and not in a good way. "In 10 to 15 years we will be living in a world with much lower volumes of cars sold and it's unclear if these companies have much terminal value given the high degree of operating leverage working against them," Tanney says.

Additionally, near-term rising rates are probably "a hindrance" to Honda, Tanney says. "I think there is also some deterioration in consumer credit," he adds. "Besides, you generally don't want to invest in companies that make heavy things out of metal if you have a long horizon."

The Bottom Line on Honda Stock

The biggest issue with auto stocks right now is investor confidence, analysts say.

"Our Cleartrend financial trend engine recently identified a new emerging upward price trend for the auto sector as a whole, indicating renewed confidence in the industry's ability to reward investors with attractive returns over the next six-to-12 months, says Mark C. Scheffler, president at Cleartrend Research .

Over the past five years, the Dow Jones U.S. Automobiles Index has produced actually resulted in modest losses (down 2.17 percent on average per year.) "Obviously, that's not an attractive outcome," Scheffler says. "But even for investors who are aware of and can take advantage of key turning points, the outcomes have historically been only marginally positive."

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The outcomes for Honda have been even less favorable, down 7.13 percent, on average, over the past five years for buy-and-hold investors.

"Currently in a weakening upward trend, we see this stock losing momentum and investors losing faith in better outcomes over the next year," Scheffler says.