October 17, 2012

Honda Motor Co. Ltd. (HMC-NYSE)

Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 10/17/2012

Current Price (10/16/12) $31.43 Target Price $33.00

SUMMARY

SUMMARY DATA Honda is well positioned to take advantage of stricter environment regulations given its long-term focus on 52-WeekRisk HighLevel * $39.20 Below Avg.,hybrid vehicles. Given these factors and favorable model 52-WeekType Low of Stock $27.61 Large-Valuemix and effective cost reduction measures, the company One-YearIndustry Return (%) 2.45 Auto -Foreignanticipates a revival in sales and profits for fiscal 2013. In Beta Zacks Industry Rank * 0.86 209 out of 267the first quarter of fiscal 2013, it revealed more than Average Daily Volume (sh) 426,195 fourfold increase in profits to ¥131.72 billion ($1.66 billion) ZACKSor ¥73.09CONSENSUS ($0.92) per ESTIMATES share. However, unfavorable foreign Shares Outstanding (mil) 1,802 currency translation effects due to appreciation of the Market Capitalization ($mil) $56,646 RevenueJapanese Estimates yen against most of the foreign currencies (In millionscontinue of $) to mar the company’s results. Further, we are Short Interest Ratio (days) 3.04 Q1 Q2 Q3 Q4 Year Institutional Ownership (%) 2 worried about its declining cash flow. As such, we have (Jun) (Sep) (Dec) (Mar) (Mar) Insider Ownership (%) N/A downgraded the recommendation on the shares of the 2011companyN/A to NeutralN/A from OutperformN/A withN/A a target107,479 price A of $33.00. Annual Cash Dividend $0.56 2012 N/A N/A N/A N/A 96,704 A N/A N/A N/A N/A Dividend Yield (%) 1.78 2013 125,518 E N/A N/A N/A N/A 2014 134,041 E 5-Yr. Historical Growth Rates Sales (%) 8.4 Earnings Per Share Estimates Earnings Per Share (%) -0.5 (EPS is operating earnings before non-recurring items, but including employee Dividend (%) 20.3 stock options expenses) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) P/E using TTM EPS 9.2 2011 N/A N/A N/A N/A $3.56 A P/E using 2013 Estimate 9.1 2012 N/A N/A N/A N/A $1.43 A P/E using 2014 Estimate 7.9 2013 N/A N/A N/A N/A $3.44 E 2014 N/A N/A N/A N/A $3.97 E Zacks Rank *: Short Term 1 – 3 months outlook 5 - Strong Sell Projected EPS Growth - Next 5 Years % 32 * Definition / Disclosure on last page

© 2009 Zacks Investment Research, All Rights reserved. www.Zacks.com 111 North Canal Street, Chicago IL 60606 OVERVIEW pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers).

Honda Motor Company (HMC) is a leading Honda’s operations are spread across Japan, manufacturer of automobiles and the largest North America, Europe, Asia and other regions. manufacturer of motorcycles in the world. Honda generates the majority of its revenues Honda is recognized internationally for its from North American and domestic markets in expertise and leadership in developing and the automobile division. The Asian countries manufacturing a wide variety of products that such as China, India, Indonesia, Korea incorporate its efficient internal combustion Malaysia, Pakistan, the Philippines, Singapore, engine technologies ranging from small Taiwan, Thailand and Vietnam remained major general-purpose engines to specialty sports contributors of revenues in the motorcycle cars. segment.

Honda operates four business segments: Honda’s operations are conducted in 33 factories across the globe, four of which are The Automobiles segment (73% of total located in Japan. To maximize production revenue in fiscal 2012) produces passenger efficiency, cost competitiveness and customer cars, minivans, multi-wagons and sport utility satisfaction, Honda has located its operations in vehicle (SUV), and mini cars. The passenger close proximity to customers. Automobiles are cars are sold under brands including Legend, produced at two sites in Japan: Saitama and Accord, Inspire, Civic, Insight, City, Acura RL, Suzuka. Major overseas production sites are Acura TL, Acura TSX and Acura CSX. The located in Ohio and Alabama (U.S.), Ontario minivans, multi-wagons and sport utility vehicle (Canada), Swindon (U.K.), Ayutthaya are marketed under brands including Elysion, (Thailand), Haryana and Uttar Pradesh (India) Odyssey, Step Wagon, Stream, FREED, and Sao Paulo (Brazil). The company uses its Edix/FR-V, Airwave, Fit/Jazz, Partner Pilot, global network of 507 subsidiaries and affiliates Ridgeline, CR-V, Element, Crossroad, S2000, to promote its “Made by Global Honda” strategy Acura MDX and Acura RDX. The mini cars are and supply its products to countries around the sold under brands including Life, Zest, Vamos world. and Acty.

The Motorcycles (17%) segment produces motorcycles that consist of sports (trial and motocross racing), business, and commuter models, as well as all-terrain vehicles, personal watercraft, and multi utility vehicles. It produces motorcycles, ranging from the 50cc class to the REASONS TO BUY 1800cc class in cylinder displacement.

The Financial Services (6.5%) segment offers  In the Automobile business, Honda focuses various financial services that include retail on introducing new products for local lending and leasing to customers, as well as markets, enhancing its global network and other financial services, such as wholesale expanding its business in Asia. financing to dealers.  With the tightening of environmental The Power Product and Other (3.5%) regulations around the world, Honda has segment manufactures various power products, decided to roll out more hybrid cars. As a including solar cell batteries, power tillers, result, the automaker plans to consolidate portable generators, general-purpose engines, its line-up in Japan to focus mainly on the grass cutters, outboard marine engines, water hybrid car business. In 2012, Honda plans

Equity Research HMC | Page 2 to launch plug-in hybrid and electric vehicles ($3.3 billion) while in the first quarter of both in Japan and in the U.S., based on fiscal 2013; it declined 5.6% to ¥67.47 new technology. The automaker will also roll billion ($851.0 million). out several models based on its existing hybrid systems technology within a year. The models include the third generation of RECENT NEWS Honda Civic Hybrids subcompact car and a hybrid version of the B-segment Honda Fit subcompact car. Honda expects to revive its Honda Profits More Than Fourfold – July 31, sales in the U.S. by offering improved 2012 lineups, including revamped Civic and redesigned CR-V and Accord. The Honda Motor Co. revealed more than fourfold Japanese automaker considers the new increase in profits to ¥131.72 billion ($1.66 products to boost sales in its biggest market billion) or ¥73.09 ($0.92) per share in the first by more than 20% in 2012. quarter of its fiscal year ending March 31, 2013 from ¥31.80 billion or ¥17.64 in the comparable  Honda has projected revenues to increase quarter of 2011. However, the company’s 29.6% to ¥10.30 trillion in fiscal 2013. profits were lower than the Zacks Consensus Operating profits are expected to increase Estimate of $1.15 per share. 168.0% to ¥620 billion, net profits are anticipated to rise 122.2% to ¥470 billion Consolidated net sales and other operating and earnings per share are expected to be revenues surged 42.1% to ¥2.44 trillion ($30.71 ¥260.78 for the year. billion) driven by higher revenues in the automobile business with the recovery in production from the twin disaster in Japan last year, and increased revenues in the motorcycle REASONS TO SELL business, despite unfavorable foreign currency translation effects.  Honda’s results are negatively impacted by the appreciation of the Japanese yen Consolidated operating profits increased against most of the foreign currencies, significantly by 679.5% to ¥176.01 billion ($2.22 including the U.S. dollar. Further, the million) from ¥22.58 billion a year ago, driven by company continues to face difficulties in higher sales volume and model mix, despite securing parts from suppliers on the back of increased SG&A and R&D expenses as well as the twin disasters in Japan as well as unfavorable foreign currency effects. severe flooding in Thailand in 2011. Segment Results  Honda’s cash flow deteriorated to ¥737.4 billion ($8.9 billion) in fiscal 2012 from ¥1.1 Revenues in the Automobile segment soared trillion in the fiscal 2011, primarily due to 60.6% to ¥1.89 trillion ($23.84 million) driven by lower profits. In the first quarter of fiscal a 10.5% increase in unit sales. Operating profits 2013, the company’s cash flow from were ¥100.66 billion ($1.27 million) in sharp operations decreased to ¥176.45 billion contrast to a loss of ¥76.23 billion in the first ($2.22 billion) from $201.70 billion in the quarter of fiscal 2012. Improved sales volume fiscal 2012-quarter. and model mix favorably affected operating profits, despite increased SG&A and R&D  Honda’s Power Product and Other segment expenses and unfavorable foreign currency continue to suffer due to lower revenues in effects. other businesses and unfavorable foreign currency translation effects. In fiscal 2012 Revenues in the Motorcycle segment scaled up ended on March 31, 2012, the segment’s 4.9% to ¥346.65 billion ($4.37 billion) due to a revenues dipped 5.3% to ¥277.1 billion 2.1% rise in unit sales. However, operating profits fell 18.1% to ¥36.80 billion ($464.0

Equity Research HMC | Page 3 million) from ¥44.93 billion last year due to increased SG&A expenses and unfavorable foreign currency effects, despite improved sales volume and model mix.

Revenues in the Financial Services segment slid 3.3% to ¥131.28 billion ($1.66 billion) due to VALUATION unfavorable foreign currency translation effects. Operating income dipped 23.8% to ¥40.84 billion ($514.94 million) from ¥53.61 billion due to a fall in residual gain of off-lease vehicle Currently, the shares of Honda Motor are sales and increased cost of credit risk. trading at 9.1X our 2013 EPS estimate of $3.44. The company’s current trailing 12-month Revenues in the Power Product and Other earnings multiple is 9.2, compared with the 8.5 segment ebbed 5.6% to ¥67.47 billion ($851.0 average for the peer group and 14.8 for the million) due to lower revenues in other S&P 500. The stock is trading at a premium to businesses and unfavorable foreign currency the peer group, based on forward earnings translation effects, despite higher unit sales. estimates. The current P/E, which is close to The segment had an operating loss of ¥2.29 the lower end of the historical range, is at a billion ($28.87 million) compared with a profit of 12% premium to the peer group for fiscal 2013. ¥260 million a year ago due to higher SG&A Our long-term Neutral recommendation on the expenses and unfavorable foreign currency stock indicates that it should perform in line with effects. the overall market. Our $33.00 target price, 9.6X our 2013 EPS estimate, reflects this view. Financial Position

Consolidated cash and cash equivalents was ¥1.13 trillion ($14.30 billion) as of June 30, 2012 compared with ¥1.25 trillion as of March Key Indicators 31, 2012. Total debt amounted to ¥3.99 trillion P/E P/E 5-Yr 5-Yr ($50.30 billion) as of June 30, 2012, down from P/E P/E Est. 5-Yr P/CF P/E High Low ¥4.11 trillion as of March 31, 2012. This F1 F2 EPS Gr% (TTM) (TTM) (TTM) (TTM) translatedHonda into aMotor debt-to-capitalization Co. Ltd. (HMC) ratio of 9.1 7.9 31.9 6.1 9.2 271.5 8.3 47.3% comparedIndustry Average with 48.3% a year ago as of 8.1 7.4 24.0 5.0 8.5 80.2 5.4 March 31, S&P2012. 500 14.3 13.4 10.7 12.5 14.8 27.7 12.0

In the quarter,Volkswagen cash AG (VLKAY) flow from operations 2.9 5.7 48.8 2.3 3.5 38.4 2.5 Toyota Motor Corporation (TM) 10.6 9.4 42.6 7.4 16.7 62.7 11.6 decreasedDaimler to ¥176.45 AG (DDAIF.PK) billion ($2.22 billion) from 8.0 6.9 9.2 4.1 6.9 27.7 4.4 $201.70 Nissan billion Motor in Co. the Ltd. fiscal (NSANY) 2012-quarter. 7.0 6.6 12.1 3.3 9.0 44.4 3.8 Meanwhile, capital expendituresTTM is trailing increased 12 months; to F1 is 2013 and F2 is 2014, CF is operating cash flow ¥135.80 billion ($1.71 billion) from ¥73.55 billion in the comparable period of 2011.P/B Last P/B P/B ROE D/E Div Yield EV/EBITDA Qtr. 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM) GuidanceHonda Motor Co. Ltd. (HMC) 1.0 3.5 0.9 10.7 0.5 1.8 8.7 Honda has projected revenues to improve 29.6% to ¥10.30Industry trillionAverage in fiscal 2013.1.1 Operating1.1 1.1 17.3 0.8 0.9 4.8 profits are S&Pexpected 500 to increase 168.0%3.7 to ¥6209.8 2.9 34.8 2.2 billion, net profits are anticipated to rise 122.2% to ¥470 billion and earnings per share are expected to be ¥260.78 for the year.

Equity Research HMC | Page 4 Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of HMC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1008 companies covered: Outperform - 15.1%, Neutral - 77.0%, Underperform – 7.4%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s

Equity Research HMC | Page 5 industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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