Why Honda is poised to rev up returns

This leading automaker should benefit from pent-up consumer demand, the rising age of cars on the road, and the introduction of new models.

By MoneyShow.com Nov 21, 2013 2:53PM
MoneyShow.comHonda logo on the grille of an 2013 Pilot at the Honda dealership in Littleton, Colo. (© David Zalubowski/AP Photo)By Mark Skousen, High-Income Alert

Based in Tokyo, Honda Motor Co. Ltd. (HMC) is one of the world’s leading sellers of automobiles, with a well-deserved reputation for quality and reliability.  Under the Honda and Acura brands, the firm sells autos, trucks, motorcycles and all-terrain vehicles.

Sales exceeded $130 billion during the last 12 months. However, many consumers put off purchasing a new vehicle during the recent worldwide economic slowdown. That situation, I believe, is about to change.

The age of the average vehicle on U.S. roads recently hit an all-time record: 11.4 years. There is enormous pent-up demand for new cars and trucks. And we are beginning to see that demand show up in the Honda sales numbers.

In the most recent quarter, sales jumped 16.3%. And they are likely to climb sharply higher in the months ahead. Honda will earn approximately $2.50 a share in 2013. But I estimate net income will climb 40% in the year ahead.

One reason is new model introductions. Another is the weaker yen. A declining currency makes Japanese cars more competitively priced in foreign markets.

And most of Honda’s sales, of course, are exports. We got a sign of what is ahead when Toyota reported unexpectedly strong sales and earnings. Plus, Honda yields 5%. And that dividend should rise with earnings in the weeks ahead.

In short, rising demand, a falling yen and new model introductions should drive this Japanese blue chip sharply higher.

So pick up Honda shares at market today. And place a protective stop at $32. If you prefer to play this one more aggressively, try the April $45 calls, which last traded at 60 cents.

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