Credit Rating Initiation: Honda Motor Company

Morningstar is initiating credit coverage of Honda HMC with an issuer rating of A+. Our credit rating focuses on the industrial operations but also considers the relative health of the firm's finance subsidiary. Honda's ratings benefit from its strong liquidity and somewhat more diversified product portfolio relative to some of its peers. The firm's good Business Risk score also encompasses Honda's impressive size and focus on producing vehicles in its end markets rather than relying on exports as some of its rivals do, which allowed it to manage through the recent downturn while generating operating profits. Further, the firm's total debt/earnings before interest, taxes, depreciation, and amortization was a modest 0.8 times at the end of the most recent fiscal year, when EBITDA hit trough levels. We forecast leverage falling to less than 0.5 times beginning in the current fiscal year based on a strong recovery in the auto market. The good Solvency Score captures the strong balance sheet along with excellent interest coverage, although returns on invested capital remain fairly weak. Honda currently has cash and short-term investments that exceed total industrial company debt outstanding. In part due to this and our forecast for healthy free cash flow generation over our forecast period, Honda generates a good Cash Flow Cushion score. While the company has historically used free cash flow for both dividends and share repurchases, these were significantly curtailed during the past two fiscal years and the firm used its substantial free cash flow in the most recent fiscal year to rebuild its cash coffers. We expect the firm to continue maintaining its conservative financial posture, including modest dividend payments relative to free cash flow, as well as its strategy of slow and steady growth. This should allow the firm to continue to manage through the cyclical and competitive risks facing the auto industry.

Source;
http://torontostar.morningstar.ca/globalhome/industry/news.asp?articleid=351553