This Automaker Is About to Get Wrecked


It's been a rough year for Honda (NYS: HMC) .

The company and its Japanese peer Toyota (NYS: TM) have been struggling since they had their supply chains devastated by the March earthquake and tsunami that hit Japan.

Even before that, the value of Japan's yen had begun its climb against the dollar, which has had a significant negative impact on both automakers. The Japanese government intervened Monday in an attempt to counter what it called excessive speculation on the same day that the value of the yen hit an all-time high.

But this intervention alone isn't expected to produce long-term results. Honda believes that one U.S. dollar may be worth about 75 yen for the rest of the fiscal year ending in March. That's not good news for the Japanese automakers, which just three years ago received more than 100 yen for every dollar in overseas sales. Honda says that every time the dollar weakens by a yen, the company loses about $200 million of annual operating profit. Toyota estimates that the yen's rise has cost the company about $4,000 in lost profits for every vehicle sold over the past year. Ouch.

Rising waters
Now comes another blow for Honda. Flooding in Thailand has inundated its car factory there and devastated its suppliers' ability to deliver critical electronic parts to Honda for its vehicles. This situation forced Honda to cut production at its plants in North America in half for at least a week, the company recently said. Honda said the production cuts could be felt in the form of low inventory for months.

The timing couldn't be worse for Honda, which was finally ramping up production following the earthquake. Also hit hard by the Thai floods is India's largest carmaker, Tata Motors (NYS: TTM) . Tata was forced to suspend work at its Thai plant where it makes its popular Xenon pickup truck.

Honda can't control natural disasters or the strength of the yen, but it has suffered some self-inflicted wounds as well. Its previously unflappable Civic was widely panned in reviews of the 2012 model, causing Honda to move forward with its planned mid-cycle update from 2014 to sometime in 2013. As Ford (NYS: F) and General Motors (NYS: GM) continue to put out solid cars, Honda needs to get back to its bread and butter -- quality and reliability -- and fast.

The numbers
"Loss." "Challenges." "Declining." These are some of the buzzwords that investors hate to hear from companies. Add another one to that list: uncertainty. Honda is in such a rough spot that it won't even venture a guess anymore as to its full-year earnings.

On Monday, the company withdrew its annual guidance because of the Thai floods and the uncertainty surrounding currency markets. The news came as part of Honda's earnings release, which fell below analyst expectations. The company saw its second-quarter net income fall by 56% to about $788 million, while revenue declined by 16%.

Feast or famine
In the cutthroat auto industry, one company's struggles are another's opportunity. Enter Ford and GM. The two domestic giants have gained significant U.S. market share since March, and both companies don't intend on simply handing it back to the Japanese automakers.

With Ford and GM each having come to separate agreements with the UAW, both were recently rewarded with a credit upgrade from all three credit agencies. Each company's corporate debt ratings are now just one notch below investment grade, making it cheaper for them to borrow money, which is great news for them as they work to fend off the challenge from the Japanese companies.

October and beyond
U.S. auto sales in October were the highest in at least eight months. Ford's sales rose 6% from last October, and GM's saw about a 2% increase from its monster October last year.

Still, Honda and Toyota were the two biggest market-share gainers in October, as pent-up demand from customers and greater inventory allowed them to see sales increases. But the Japanese automakers had to rely on higher incentives from last year to help drive sales, which cut into their bottom line more than in prior months.

Foolish bottom line
You have to almost feel bad for Honda at this point. The company was dealt a bad hand and then made it worse by losing sight of what made the company great -- the superior quality of its products.

Moving forward, I'll be most interested to see how Honda fares as it tries to get its act together -- and, specifically, how much the Thai floods affect Honda's inventory levels in the next few months.

And how well Honda can recover after releasing a subpar Civic.

And how much of Honda's profits the strong yen will continue to erode.

In case you didn't notice, there's a lot of uncertainty surrounding the company. Even Honda CFO Fumihiko Ike said on Monday, "To put it bluntly, we're in a really tough spot."

I agree, and that's why I'll be steering clear of Honda for now.

No matter how difficult of a position Honda is in, it almost always finds a way to pay a dividend. If you're looking for some other solid dividend producers, check out our free report -- "13 High-Yielding Stocks to Buy Today." These companies were hand-picked by our team of analysts for their superior dividend performance. Access this report right now -- it's free!

At the time thisarticle was published Brendan Byrnes and The Motley Fool own shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.