Analysis of Honda Motor Company

Report by Valanium Analysts: Yutaka Matsumoto, Yuichi Murakami, Michio Okazaki (,, ) Investment Recommendation: MARKET OUTPERFORM December 3, 2001

NYSE (11/30/00) 52 week range Revenue (2002 Est.) Market Capitalization Share Outstanding

$ 76 $ 54.59 - $92.35 $ 60.08B $ 37.02B 487.2M 0.55% 34K

EPS Forecast FYE 12/30 EPS Ratios Forward P/E Forward PEG M/B

2001A 2002E 2003E 2004E $3.85 $5.49 $5.88 $6.27 Firm 12.42 1.96 1.97 Average of Competitors 21.47 3.95 1.73

Dividend Yield Avg. Daily Trading Volume

Book Value per Share (9/2001) $38.7 Return on Equity 13.02% Return on Assets 4.75% Est. 5 Years EPS Growth Rate 6.35% Industry Automobile

Valuation Predictions Actual Current Price $ 76 P/E Valuation (Ordinary) $ 131.38 P/E Valuation (Segment Adjusted) $ 119.46 PEG Valuation $ 153.5 M/B Valuation $ 66.58 EBO (Abnormal Earnings) Valuation $ 43.97 DCF Valuation $ 84.71 Performance of HMC 52 week change of HMC Return on S&P 500 8.1% -16.8%

Investment Summary • We assign a rating of market outperform on Honda Motor Company at its current price of $76 and a 12-month target price of $85 (based on DCF valuation). • Comparative P/E and PEG analysis also show that Honda is undervalued compared with its competitors such as GM, Ford, Daimler-Chrysler, etc. • We expect Honda’s market share in the Northern American market, where Honda generate 8090% of its operating profit, due to the introduction of Minivan/SUV. • Favorable change in the product mix would lead to the improved operating profit margin. • Global consolidation trend by the major competitors may disadvantage Honda’s global strategy. US recession and volatile currency may hit Honda’s sales.
Rating System: BUY: A strong purchase recommendation with above average long-term growth potential. MARKET OUTPERFORM: A purchase recommendation that is expected to marginally outperform the return of the market. MARKET PERFORMER: A recommendation to maintain current positions with returns to match that of the market. SELL: A recommendation to sell the security (or short the security) as it is expected to decrease in price in the medium term.

2001. Honda will continue to shift production overseas to mitigate currency risks.6 million units to 2. Ford's CEO.0 million units by fiscal 2004. is the US's #1 auto finance company. with unit sales worldwide increasing 4. increases global production flexibility and increases the speed of new model launches. 2000. including its motorcycle and power products businesses. In Japan.Strategic Analysis Business Summary Honda Motor Co. while the operating margin was 6. behind General Motors. ranging from small general-purpose engines to specialty sports cars that incorporate Honda's highly efficient internal combustion engine technology. improvements were made to many aspects of the production process from the perspectives of quality. reduces tooling costs. the #1 car rental firm in the world. Jaguar. Mercury. These moves will include the transfer of general-purpose engine production from six lines at the Hamamatsu Factory to two new flexible lines at the Kumamoto Factory. and Volvo. Lincoln. Legend. Honda introduced its New Manufacturing System. as well as the luxury Acura and the Insight -. the principal achievements of these improvements included: 1) 50% reduction in specific investment associated with the introduction of new models. Ford Motor Credit. Ford's finance subsidiary.1%. The Company has been steadily advancing the new system and began operations on the first revamped line at the Suzuka Factory in May 2000. and Civic. which improves product quality. This increase in unit sales helped offset the negative impact of the yen appreciation on net sales. cost. including 118 production facilities in 33 countries. to coincide with the introduction of the new Civic.222 million). Ford owns a controlling (33%) stake in Mazda and has purchased BMW's Land Rover SUV operations. In adopting the New Manufacturing System. Operating income amounted to ¥320. is Japan’s #3 automaker after Toyota and Nissan and the largest manufacturer of motorcycles in the world. Competitors Ford Ford is world’s #2 maker of cars and trucks. Production Process Improvement through the New Manufacturing System In September 2000. The company's car models include the Accord. J. Honda is planning to adopt the new system overseas in the future. Ford also owns Hertz. Honda achieved record-high automobile sales in all regions other than Europe.3% compared with the previous fiscal year.4% from the previous fiscal year.58 million units. which amounted to ¥5.3 billion ($42. Honda plans to continue overseas production Regarding the production of power products in Japan. 2) 50% reduction in the initial investment required for building a new production line. an increase of 5. production flexibility and environmental compliance.5 million Honda engines were sold worldwide during the fiscal year ended March 31. Ltd.a gasoline-electric hybrid.231. The Company is recognized internationally for its expertise and leadership in developing and manufacturing a wide variety of products. 4) Increase in the number of models that can be manufactured on a single line from five to eight. It is the world’s largest producer of internal combustion engines. Ford. Japan and North America each account for more than 40% of sales. with plans to reduce annual production output from the current approximate 2. resigned in late 2001 and was replaced by . Overall performance in FY Mar. to 2. It has a global network that comprises 434 subsidiaries and affiliates. 2001 During fiscal Mar.1%. established in 1948.583 million). decreasing 8..0 billion ($2. It makes vehicles under brands that include Aston Martin. Nasser.. 3) 30% reduction in production time from the initial process to final vehicle inspection. Approximately 11.

while respecting the identity and culture of each company and not interfering in operations. 2) Honda has gained large benefits of economies of scale in internal combustion engines because of its motorcycle and power product . with Renault raising its equity participation in Nissan from 36. and Financing and Insurance Operations. vehicle insurance. which accounts for more than 80% of all vehicles produced globally. The Daimler Chrysler Group is active primarily in Europe and in the United States. trucks and buses worldwide under the Toyota. Nissan Nissan Motor Co. manufactures commercial vehicles. 1) Alliances and mergers often fail to live up to expectations. Jeep and Dodge. industrial equipment. full-service leasing and fleet leasing. Renault-Nissan BV will steer Alliance strategy and supervise common activities on a global level. GM GM is the world’s #1 manufacturer of cars and trucks. Toyota accompanies its automotive business with a large business portfolio in financial services. including sales finance. and marketing of cars. a joint and equally owned management company operating under Dutch law. car and truck extended service contracts. However.chairman and great-grandson of the company's founder. we consider Honda is unlikely to be substantially disadvantaged by its refusal to join the consolidation trend for the following reasons. as well as the operations of Hughes Electronics Corporation. manufactures and markets cars. residential and commercial mortgage services. with headquarters in Paris and Tokyo. General Motors Corporation has two operating segments. Ltd. 1998 in the course of the business combination of Daimler-Benz Aktiengesellschaft and Chrysler Corporation. prefabricated housing. Lexus and Daihatsu brands. Additionally.8% up to 44. General Motors. was established in 1933 to manufacture and sell small Datsun passenger cars and auto parts.. manufacturing. The plan provides for cross-shareholdings. Toyota Motor. Nissan would acquire an equity stake of 15% in Renault. vehicle and homeowners' insurance. trucks. Through its alliance with Mitsubishi Motors Corporation. Risks Global consolidation trend not seen as major disadvantage for nonparticipating Honda Honda has remained steadfastly independent while the global auto industry has rapidly consolidated in the past few years. Only six groups—in order. provides related financial services and has aerospace operations. and asset-based lending. Daimler Chrysler. and Renault announced a plan to accelerate development of the Renault-Nissan bi-national group. and credit cards. and heavy-duty transmissions and related parts and accessories. Daimler-Chrysler Daimler Chrysler AG. Daimler Chrysler AG was incorporated on May 6. the Group expects to increase its presence in the Asian market. and leisure boats. Plymouth. Ford Motor. William Clay Ford Jr. manufactures and sells cars and trucks under the names.. locomotives. Canada and Mexico. Other diversified businesses include telecommunications through a subsidiary. which provides a broad range of financial services. including consumer vehicle financing. Volkswagen and Renault-Nissan Motor—produce more than 4 million vehicles per year in the world. Communications Services and Other Operations. consisting primarily of General Motors Acceptance Corporation. Ltd.4%. Automotive. through a reserved capital increase. The Ford family owns about 40% of the company's voting stock. Daimler Chrysler is a typical example. Mercedes-Benz. which consists of the design. dealer financing. Toyota Is Japan’s largest and the world’s 4 th largest car manufacturer? Toyota sells. Chrysler. Nissan Motor Co. Renault and Nissan would create Renault-Nissan BV.

in which the lightvehicle market falls drastically.000 units in fiscal Mar. such as in spring 1995 and autumn 1998. the average unit price would rise in the Honda’s Northern American segment. Combined with the light-vehicle business.8% from the previous fiscal year. . net sales increased 7. and net sales amounted to ¥1. the unit sales basically stayed flat in the 1990’s although there were ups and downs in yearly basis. Although U. Concurrently. making Honda the largest producer of petrol engines in the world. However the risk is foreign exchange rate volatility. an increase of 1. 2001. an increase of 9. and the Life Dunk minivehicle contributed to FY Mar. In the next five years. 2001 results.529. due to the favorable product mix change.S.346. these represent more than 10 million units per year on a consolidated basis. Other larger makers that have invested heavily in alliances—particularly with companies in difficult situations that subsequently require substantial financial and management resources to correct— may find that they are unable to spare as much relative to their size in forward-looking R&D.000 units to meet the massive demand for the Odyssey and Acura MDX. due to the sluggish economic situation.000 units. In the 1990’s the industry continued to grow for a long time and recorded historical high sales in 1999. economy. Growth Prospects (Please see Appendix A for numbers.209 million).2001. average monthly sales of the Stream vastly exceeded the original sales target of 6. 2001in North America. to surpass 10. Honda’s unit sales is not expected to fall significantly. In addition. we assumed the trend would go back to that of “before 90’s” and the unit growth would be basically zero although there would be ups and downs yearly basis.S.3% of total revenue of Honda. Even in a hard-landing scenario. to 5. as well as a growing presence in the lighttruck segment. the new Stream minivan. Anticipating that the light truck market will continue to be a growth area. For fiscal Mar. In our view. we assume Honda can gain market share in the Northern American market due to the introduction of new products in Minivan/SUV segment. it is expected to drop to the 16. In Japan FY Mar.97 million units. which has a major impact on Honda’s share price. In particular.5 million unit level in 2001 amid concerns over a continuing economic slowdown.4 billion ($24. especially in the light-vehicle market. as well as the introduction of the brand-new Acura MDX SUV. Brisk sales of the Odyssey and Acura TL.8%.6%. In FY Mar. one of the principal risks for Honda is a full recession in the US.000 units in sales. the automobile sales have been cyclical with duration of 5-7 years. helped improve the Company’s model mix and contributed greatly to these results. finds relatively more favor with comparatively recession-proof middle-class consumers. North America accounts for 57. Due to a superior product line-up. Even for US recession and exchange rate movements Honda expected to sustain earnings growth Although the cooling of US economy.0 million to 16.000 to 180.businesses. In the Japanese market.) In Northern American market before the 1990’s.8%. 2002 to expand to 1. However. total industry demand grew 1.9% to 776. Clearly. Even amid fears of a slowdown in the U. Honda’s unit sales in Japan for fiscal 2001 increased 9. the correlation between the yen-dollar rate and the share price is greatest when there are sharp movements. Further. production of the Odyssey will start in the new plant in Alabama in late 2001. The Company expects its North American sales in fiscal Mar.4 billion ($12. we expect exchange rate gains to deliver growth. Honda plans to expand the production capacity at the second production line of the Alliston plant in Canada from 170.4 million units during calendar 2000. Strong sales of the redesigned Civic. Honda sold a record-breaking 1.6%.37 million units.000 units.344 million).999. industry demand grew 2. to 17. we anticipate that the company’s second and third most important businesses—cars in Japan and motorcycles in developing Asia—will grow over this period to further cushion any downside risk to overall earnings. to ¥2.

we believe that the growth in this business would get into steady growth stage in the next five years.512 million). so we set the market’s unit sales growth as zero in the next five years.3%. Our assumption of the Honda’s sales in Europe only reflects macroeconomic inflation. Honda rapidly expanded its direct financing lease business in the mid-late 90’s taking advantage of its excess cash flow it generated in its automobile business. in the foreseeable future. However. Assumptions on the components of the net income (Please see Appendix A for details. We believe that it is difficult to assume the Japanese market to recover in the foreseeable future. the macro economic and political situations are not stable in this market. and net sales declined 30. as it has been.000 units. We also assumed Honda’s market share and the unit price stay constant. compared with that of automobile markets. as it did in the early 90’s. including the appreciation of the yen. compared with that of automobile markets. as in the Northern American market. better than those of developed countries. our assumption of Honda’s sales in other markets only reflects macroeconomic inflation. Due to this business environment. 2) Honda does not have to build new factory. 2001. a brand-new 1. Other market’s growth prospect is.) COGS/Sales We assumed COGS/Sales to decline over the next five years. The unit price would stay the same because of the deflationary economic condition of the Japanese economy and the favorable product mix change is not likely. However. because automobile is still expensive in the developing countries’ standard but people in developing countries afford motorcycle. we assume unit growth in this market is 5% for the next five years. Honda’s automobile unit sales in Europe declined 23. We also assumed Honda’s market share and the unit price stay constant. in the long run.2002. the introduction of the redesigned Step WGN. the Company anticipates an increase in unit sales to 830. the weakness of the euro against the sterling pound and pricing pressure in the United Kingdom. we assume Honda can gain market share supported by the popularity of its Minivan/SUV in the younger generation. Motorcycle market’s prospect is better in terms of unit sales. several factors negatively impacted automobile operations during fiscal Mar. In Europe. However. We believe that Financial Services grows steadily at 5% in the next 5 years. We believe that Financial Services grows steadily at 5% in the next 5 years. However.3-liter small car with the new i-DSI (Dual & Sequential Ignition) gasoline engine. Therefore. to 191. as well as the all-new CR-V and Integra. Therefore.8%.2 billion ($2.000 units. as in the European market. Honda’s market share is likely to stay constant because we believe it is difficult. we assume unit growth in this market is 5% for the next five years. . Therefore. Motorcycle market’s prospect is better in terms of unit sales. because automobile is still expensive in the developing countries’ standard but people in developing countries afford motorcycle. based on full-year sales of the Civic. The reasons are: 1) the increase of SUV in its product mix would lead to higher average gross profit per unit. Honda rapidly expanded its direct financing lease business in the mid-late 90’s taking advantage of its excess cash flow it generated in its automobile business. to ¥311. we believe that the growth in this business would get into steady growth stage in the next five years. to establish Honda’s favorable brand image in the European market in the short period of time.

and intelligent transportation system. (If we add the profit from export from Japan to North America.0% 100. Effective Tax Rate declined in the 90’s due to the tax rate cut of the Japanese government.12 2.99 49.61 1. In addition to the ordinary P/E analysis. Why do we value Honda as if it were a US Company? We picked up Honda for this report and valued it as if it were a US company.0% 7. considering tax benefit and assuming tax rate is 50%.25 24.) 2001.6% 8.2% 57. and Price/Sales ratio. Almost all auto .0% Valuation Analysis Comparative valuation methods We applied P/E.3% 6.89 6. Interest/Debt would rise if the Japanese economy recover or falls into inflationary situation.83 Forward P/E 12. R&D/Sales.P/E valuation Next year's expected Company Honda Toyota Nissan Ford Daimler Chrysler GM Ticker HMC TM NSANY F DCX GM Current Price($) 76 51.45 27. M/B.0% 1. the average P/E of competitors is 21. Interest/Debt.0% Operating Income (Geographical Breakdown) Japan North America Europe O thers O u tside Japan E liminations Consolidated W e ight 35. Dep. 80-90% of the operating profit is from North America. it is difficult to reflect those kinds of macroeconomic risks in our assumption at this point. including hybrid and fuel cell. because these methods allow us to valuate Honda’s stock price from the various perspective.5% 100.0% -13.45 27. Based on the adjusted P/E.9 10 18.94 41.42 19. Dep.3 2001.8% 0. 68% of Honda’s operating income is from North America.SG&A/Sales.16 Since Nissan had a big loss in the previous several years and Carry Net Loss./PP&E would stay constant since Honda is not likely to invest in totally different equipments from usual ones./PP&E.62 24.60 22. We get the expected price of $131. SG&A/Sales can be assumed to stay constant because Honda is likely to maintain its competitive advantage for the foreseeable future and does not have to increase its sales incentives and ad. . We assumed that there would be no tax rate change in the foreseeable future.3 Sales (Geographical Breakdown) Japan North America Europe Others Consolidated Weight 29.38 per share for Honda.60 22. However.16 Adjusted P/E 12. we took into account the financial services apart from the main businesses.42 19.87 1. 2) Based on the company disclosure.9% 68. Tax rate We assumed these ratios basically stay the same over the next five years.77 1.51 0.89 13. PEG.47. we adjusted Nissan’s P/E by doubling the initial ratio.7 EPS($) 6. R&D/Sales should keep its level for the development of fuel-efficient engines. We believe it is reasonable to do so because: 1) 57% of the Honda’s automobile sales is from North America.

Ford.71 1. we did not adopt PEG ratio to get our target price.77 24.96 Company Current Price($) BV per share($) Honda 76 38.6 From the above data.51 13.47 Daimler 41. .42 6.44 and 54.00 5.12 12.98 Nissan 10 1. 18.95.42 19.81 Ford 18.7 51.89 5.7 1.23 0. Since the recent US recession hit the Honda’s competitors such as GM.5.97 1.67 2.21 GM 49. PEG valuation Next year's expected Adjusted Average growth rate Company Current Price($) EPS($) forward P/E in the next 5years(%) PEG ratio Honda 76 6. and GM from Yahoo finance consensus estimates and those of Toyota and Nissan from the estimates of Japanese analysts.65 Ford 18.73.96 Toyota 51.35 1.89 24.46.83 27. we did not consider P/E analysis a good indicator to get our target price for the following reasons. Daimler-Chrysler. including auto leasing service. Although these expected prices are much higher than current price of $76.94 7 Daimler Chrysler 41. Ø Although P/E in the automobile industry has been historically less than 10. % sales of Automobile % sales of division and others financial division 97% 3% 96% 4% 83% 17% Honda Toyota Ford Forward P/E 12.07 GM 49. the new expected price for Honda was lower than the price we calculated first. rental car service.94 0.43 The average PEG ratio of competitors is 3.50 4.61 19. and rental equipment service. and Daimler-Chrysler seriously. Applying these P/E to Honda’s case. M/B valuation M/B ratio 1. we get each P/E ratio for automobile division and financial division. and calculated each P/E based on the sales data of Toyota and Ford as follows.16 5. we get the new P/E of 19.9 2.00 3.58. Since Honda has the relatively lower percentage of financial service than the other competitors and financial service has relatively higher P/E than automobile service.60 5.companies have financial division. We got the average growth rate of Ford.52 and expected price of $119.99 The average M/B ratio of competitors is 1.65 respectively.45 7. We assumed that this financial service has the different P/E from the automobile manufacturing service.5 Toyota 51.9 31. We believe this price more reflect the business segment structure. and the expected stock price of Honda is $153. P/E ratio for the Honda’s competitors has risen up extraordinary.08 2.25 5.99 1.02 Nissan 10 4.00 3.99 34.00 2.87 22. The expected stock price of Honda is $66. the forward P/E is estimated to be around 20. For the almost same reason.

is relatively low compared . which is slightly higher than the current level.94 41. M/B ratio does not reflect the current value of companies. we checked Honda’s credit rating and used interest rate assuming that Honda issued all of its debt in the US market. We assumed that Honda would expand its direct finance lease business into the future. Ø M/B does not take into account intangible assets. We believe that most of the Honda’s competitors are suffering from the recent decrease in profit margin. The ƒÀ 0. Price / Sales valuation Company Honda Toyota Nissan Ford Daimler Chrysler GM Current Price($) 76 51. Ø M/B is based on only historical data and does not reflect the future cash flow. and its terminal growth rate of the residual income.4.22 88. We also performed sensitivity analysis by changing its cost of equity within its 95% confidence interval. The expected stock price of Honda is $45.Although M/B ratio reflects the current asset value.66 P/S ratio 0.67 58.13 24.99 49.01 319. Since P/S ratio does not reflect the profit margin. Cost of Debt Also for cost of debt. Ø Since BV of equity is based on the historical value. Therefore.35. with its US competitors. but not to the extent that is equivalent to the US competitors.85% above the fair value.82 135. we did not adopt this analysis to get our target price for the following reasons. . We assumed the terminal growth rate of the residual income beyond FY2007 is 0%. This is because US competitors’ financial service segments have a larger weight in their total business.6 with a 95% confidence interval of •} 0. Based on this analysis Honda’s current stock price is 72.16 The average P/S ratio of competitors is 0. This is partly due to low debt to equity ratio of Honda.89 0.41 0. Assumptions of EBO and DCF Analysis Cost of Equity and Equity ƒÀ Because we tried to value Honda as if Honda were American Company. which we derived as $43. but much lower than those of US competitors.9 10 18.31 0. we set the target debt to equity ratio 1.97.21 0.53. Target Capital Structure The debt to equity ratio of Honda is almost the same as that of Toyota. we did not consider this ratio a good indicator to get our target value. EBO Valuation We performed EBO valuation for Honda and the result is shown on the next table.66 0. we measured Honda’s ƒÀ against S&P500.7 Sales pre share($) 114.

85 43.68% 6.80 43. which we derived as $84. Honda’s financial services consist most of auto leasing business.M.91 43. Honda has relatively lower ratio of financial service to .40% 18.96 43.783 9.34 48.91 N.37% 1. the growth rate of A/R of Honda was greater than that of total sales in the last five years.48% 4.97 43.71.170 -9.46 43.892 25.83 43.00 107.71 148. and the terminal growth rate.91% below the fair value.72% Average 5.87 43.84 43.56% Mar-01 52.48% 7.78% 10. we examined the quality of sales to detect if Honda has been taking overaggressive sales booking.511 -10.0% 11.83 43.00% 43.2% Terminal Growth Rate 0% 3% (Main) 10% 118.81% 8.30% 15.11 199.92 58.00% (Mean) 43.787 N/A Mar-99 51.23 84.418 6. during this period.Aggressive sales booking First of all.EBO Valuation of Honda Motor Company Cost of Equity 14.653 6.344 16.96 43.M 20.00% Terminal Growth Rate 0% (Main) 3% 5% 10% 43. Total sales ($million) %Growth in total sales A/R ($million) % Growth in total AR Sales in financial % growth in sales of financial service A/R in financial service % growth in A/R of financial service Mar-97 42.36% 6.57 N. 10.67% Mar-00 57.73 43. As we can see the below.153 -10.84% The above is the change of growth rates for total sales.M.46% 6.09% 758 N/A N/A N/A Mar-98 45.97 43.292 -15. total A/R.489 14.58% 1.16% 9. As we mentioned in comparative valuation part.057 48. However. from which A/R of Honda has significantly increased.4% (Mean) 75.98% 1.28% 43.51 9. We assumed the terminal growth rate of the free cash flow was 3% (expected inflation rate) beyond FY2007.211 3.20% 9. N. 15. We also performed the sensitivity analysis by changing its WACC within its confidence interval. Based on this analysis Honda’s current stock price is 35. Honda has been expanded its financial services significantly.74 20.3% 39.688 13.38 N.48 WACC 10.986 28.00% 43.88 43.98 63.572 20.85 43.366 23.07% 5.04% 1.39 Quality of earnings analysis .85 43. and sales in financial service.455 11. DCF Valuation of Honda Motor Company 7.90 43.74 DCF Valuation We performed DCF valuation for Honda and the result is shown on the next table.16% 10.79 380.M.

096 10.6% Mar-98 5.622 17.5% 17.448 27.53 0. Average Operating Standard deviation of Average Standard deviation Company Income Operating Income CFO of CFO Ratio Honda 4038.815 1.139 3.7% 32. we can say that Honda has not been taking overaggressive sales booking though the growth rate in A/R was greater than that in sales in the last five years.984 29.170 36.2% 5.5% 29.0% 3.0% 45% 5.059 24.867 0 2.5% 69.744 3.706 5.015 2.4% 1.083 41.1% 69.50% .7% 6.386 11.654 2.576 3.133 Mar-00 46.475 3.984 42.409 178 3.0% -0.502 2.420 5.078 12.8% 67.9% 6.731 231 2.8% 27.7% 45.9% Mar-04 4.36 1.106 160 994 0 505 488 1.153 10.3% 23.35% 2.3% 8.057 2.40 2821.26% 72.6% 7.5% 3.5% 4.222 12.344 24.6% 69.9% -15.534 44.578 45.9% 5.3% 50.05 3946.524 1.0% 24.5% 39.50% 0.697 18.77 1481.3% 8.184 5.161 4. Consequently.7% 3.4% Other Income/Expense/Sales Effective Tax Rate Dep/ ross PP&E G 0.2% 5.4% 2.844 8.362 14.3% 12.2% 23.9% 8.9% 5.9% 15.65 2384.941 222 923 209 3.418 31.533 25.000 61.49 Daimler 8978.12% 7.0% 27.494 759 456 343 503 140 557 0 327 230 1.9% 6.344 3. Since the ratio of Honda is much higher than 1 and the average number of competitors’ ratio.916 2.777 28.8% 9.00 7789.2% 58.2% 69.472 1.144 115 4.8% 1.6% 11.2% 23.833 13.9% 23.5% 72.381 8.20 7649.5% 3.514 1.3% 8.147 4.301 12.083 8.239 3.2% 3% 5% 2% 3% 5% 5% 0% 4.2% Mar-03 2.20 GM 23365.236 243 0 0 5.653 29.366 15.909 37.004 16.688 9.585 5.900 206 3.3% -5.3% 1.537 Mar-97 34.070 10.87 0.0% -7.6% 2.390 9.9% 16.7% 0.500 2.713 3.677 1.822 35.807 1.853 9.7% 72.7% -0.832 1.2% 16.8% -3.0% 5.056 10.154 3. So.343 10.0% 1.655 57.36 971.366 2.782 1.285 5.46 0.8% 27.32% Mar-99 15.6% -13.220 29.2% 43.7% 2.255 2.154 693 321 1.0% 4.60 2926.3% 27.7% 5.628 3.367 2.0% 18.0% 13.6% -9.235 1.46% Mar-02 15.685 12.5% 13.141 4.455 39.283 7.6% 3.2% 22.44 The average ratio of competitors is 0.078 0 1.082 52.440 1.317 2.579 2.214 0 548 666 1.2% -4.0% 72.50% 0.1% 3% 3% 2% 3% 5% 5% 0% 3.8% 16.0% 25.2% 3.8% 4.69 1.22 10381.9% 68.138 84 1.831 19.6% 5.8% 4.5% 8.016 1.207 4.9% 18.9% 31.0% 4.906 3.209 2.526 3.6% 15.723 1.1% 22.the automobile service than the other competitors and expanded it recently.500 2.860 14.7% 25.028 180 0 0 4. Appendix A: Honda’s Income Statement Sales Automobile Japan North America Europe O thers Motorcycle F inancial Services O thers Consolidated Sales COGS G ross Profit SG&A R&D O perating Income NOPAT 1.52 0.905 2.495 151 1.088 10.74 Nissan 4681.780 15.530 1.976 11.7% 19.482 8.04 19138.3% 58.622 Mar-01 42.08 397.123 2.446 260 0 0 5.2% 48.468 3.556 758 2.586 Mar-03 50.435.2% 25.85 704. .500 1.190 2.474 33.2% 1.4% 30.874 1.7% 1.393 3.144 51.8% 27.8% 2.4% 0.054 18.9% 69.26% 2.484 0 2.5% 6.0% 45% 5.9% 1.2% 5.677 30.412 204 863 164 503 689 1.000 60.037 23.619 Mar-98 35.163 6.6% 39.497 0 1.552 2.Smoothing volatility of earnings using accruals Next.0% 31.1% 30.705 15.1% 42.5% 5.385 10.636 Mar-04 52.2% 70.293 5.848 3.9% 30.047 3.263 42.208 725 385 1.237 241 4.5% 16.53% 2.3% 5.688 35.105 9.7% -6.99% Mar-01 -9.292 2.150 0 2.773 1.556 Mar-99 41.301 15.976 7.4% 5.3% 16.464 20.9% 5.973 173 0 0 3.351 810 288 1.78 Toyota 11454.7% 16.64 3409.5% 7.69 10607.800 12.1% 73.606 2.1% 27.127 26.000 64.523 1.60 4418.100 209 1.389 32.9% 13.15% Mar-00 12.704 Interest Expense Non-operating Income/Expense Other Income/Expense Pretax Income Special Items Net income Depreciation Income Taxes Mar-97 Sales(YoY) Automobile Japan North America Europe O thers Motorcycle F inancial Services O thers Consolidated Sales C O G S /S a l e s G ross Profit/Sales S G & A /S a l e s R & D /S a l e s O p e r a t i n g I n c o m e /S a l e s Interest/D e b t 3.64.2% 24.0% 17.0% 57.34 Ford 31404.78 2445.435 0 1.8% -21.375 Mar-02 48.2% 2. we calculated the ratio of the scaled standard deviation of Operating Income over the past five years to the scaled standard deviation of CFO over the past 5 years for Honda and the other competitors to detect if Honda is manipulating the timing of gains and losses for smoothing the earnings.288 1.275 2.400 1.157 6.818 3.2% 7.0% 5.513 3.345 44.115 0 1.0% 46.109 1.0% 45% 5.1% 16.88 24194.7% 3.422 3.24 935 561 373 724 215 777 0 448 329 1.90 4508. we can conclude that Honda is not smoothing its earnings by manipulating the timing of gain and loss.888 9.5% -3.736 13.575 2.50% 3.175 3.973 1.389 1.1% 30.8% 0.6% -40.880 39.

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