What's going on?
Honda gave a mixed results update on Friday, with the Japanese carmaker unable to shake the same nagging problems that have been lingering for months now.
What does this mean?
First, the good news: Honda sells a lot of cars internationally, meaning its revenue is worth a lot more when it’s converted back to a flailing yen. That pushed up its full-year sales by a better-than-expected 10% from the year before. But there are reasons to be nervous: the company sold just 4.1 million cars last financial year – fewer than it did the year before and the year before that. That suggests these supply chain disruptions and chip shortages aren’t going away, and won’t be anytime soon. Layer on Chinese lockdowns and higher raw material costs, and the company’s expecting its operating profit to shrink 7% this year from last – not exactly the 8% increase analysts were banking on…
Why should I care?
The bigger picture: The yen gives with one hand.
The weaker yen comes with a downside: it makes already-pricey imported commodities even more expensive, which could end up denting Japanese carmakers’ profit margins. That’s partly why they all seem to be letting investors down right now: Nissan’s profit projections fell short of forecasts too, and Toyota – renowned for its strict cost management – is predicting that its operating profit will drop by 20% this financial year.
For markets: Expectations probably shouldn’t be this high.
Japanese companies have another problem on their hands: the gap between consumer inflation and producer inflation – which reflects the rise in prices that factories charge wholesalers – hasn’t been this big since 1980. That suggests Japanese companies are going to have to take a hit to their profit margins, even as analysts’ estimates for Japanese company profits are at their highest in 17 years, according to Bloomberg. So whether analysts end up downgrading those estimates or companies end up missing them, investors are going to be disappointed.