Japan's yen drives gains for Honda

This automaker is a top way to benefit from a declining Japanese currency and a rising Japanese stock market.

By TheStockAdvisors May 13, 2013 9:47AM

Car salesman showing couple new silver hatchback in car showroom © Juice Images Cultura Getty ImagesBy Gavin Graham, Internet Wealth Builder


As a means of playing the recovery in Japan, I suggest looking at some of the Japanese automakers with ADRs; I especially like Honda Motor (HMC).


Honda is a great way to benefit from the decline in the Japanese yen since new Prime Minister Shinzo Abe demanded the introduction of an accelerated form of quantitative easing at the Bank of Japan. As the eighth largest auto producer in the world and the largest motorcycle maker, Honda is well placed to benefit from a cheaper yen.


Although Honda makes more than 90% of the cars it sells in North America in the U.S. and Canada, it still receives the benefit of reporting U.S. and Canadian sales in a weaker yen.


At 100 yens=1 U.S. dollars, Morgan Stanley calculates Japanese automakers' top lines will receive a boost of US$2,000 for each car they sell in the States (the exchange rate recently was 97.24 yens=1 U.S. dollars.


Plus, the weakness of the Japanese currency helps its sales in other markets such as China and India, against its Korean, U.S. and European rivals.


In the fiscal year ended March 31, Honda earned $3.9 billion, or $2.17 per share (figures in U.S. dollars), up 52% from $2.8 billion, or $1.43 per share, the year before. Sales were $105 billion, up 5% from $100 billion for the previous year.


The company will be raising its dividend 5% from 76 yens to 80 yens. This would put Honda at a forecast price-to-earnings ratio of 11.5 times and a dividend yield of 2.1%, compared to Toyota which has a forecast price-to-earnings ratio of 15.6 times and a 1.3% yield.


Cyclical industries such as automakers are stocks that should be bought and sold rather than held for the long term. This is the correct stage in the auto cycle to own these companies. As such, Honda is a "buy."


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