Auto Pair Trade: Goldman Sachs Buys Toyota, Steps To Sidelines On Honda

Honda Motor Co Ltd (ADR) HMC reported strong May sales, while Toyota Motor Corp (ADR) TM faded, but one analyst expects their fortunes to reverse soon. 

The Ratings

Goldman Sachs analyst Kota Yuzawa downgraded Honda to Neutral and cut the price target denoted in Japanese yen.

Yuzawa upgrade Toyota to Buy and increased the price target target.

The Thesis 

By Yuzawa’s estimate, revenue growth is unlikely considering rising competition in the U.S. — Toyota’s key region — where sales volume and market share have waned.

The automaker's commitment to cutting cost of goods sold could drive profits, the analyst said. 

“We expect Toyota to establish a leaner earnings structure over the next few years, with benefits not only from the increased use of common platforms under Toyota New Global Architecture, but also from CoGS improvement initiatives that extend to affiliated parts makers and an overhaul of other costs, particularly on the office side of the business." 

The same U.S. sales environment challenging Toyota is seen to stunt Honda and prompt an increase in sedan incentives. Yuzawa expects Honda operating profits to miss consensus.

Nonetheless, the firm could be buoyed by its motorcycle business generating 30 percent of earnings, the analyst said. 

Price Action

Toyota shares were up 2.52 percent at the time of publication Monday and Honda was up 0.44 percent. 

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