Honda's Motorbike Unit Deserves More Credit

(Bloomberg Gadfly) -- The world's biggest motorcycle company isn't getting the credit it deserves.

Honda Motor Co. has been the world's top maker of two-wheelers since 1959, but it's often thought of as primarily a car company. That's not really surprising: A scooter like the Activa may shift millions of units, but it's unlikely to get the pulse racing like an NSX sports car, or even the ubiquitous CR-V SUV.

Still, investors pondering Honda's forecast 14 percent drop in full-year profit Friday would do well to reflect on the motorbike unit's little-heralded success.

Activist investors looking for fresh ways of unlocking value from corporate Japan might want to go further: Honda's shareholders could be better off if the long marriage between its two-wheel and four-wheel divisions was dissolved.

Consider margin. Honda tends to more or less give away its cars, with operating margins that averaged just 3.5 percent over the five fiscal years through 2017. It frequently makes more money financing vehicle sales than on the cars themselves: Operating income from financial services was 199 billion yen ($1.8 billion) in 2016, compared with 153 billion yen for automobiles.

Motorcycles do much better, with a five-year average margin of 9.8 percent and 182 billion yen of operating income in 2016 -- more than Honda made from cars.

That motorbikes are a better business than cars isn't big news. Two-wheelers have few brands with global scale, making the market a lot less cutthroat than it is for four-wheelers. They also tend to be regulated with a lighter touch, since they don't do so much damage in a crash and are rarely used for sensitive tasks like transporting children. On top of that, they're naturally concentrated in emerging markets, which are seeing most of the volume growth in the automotive industry.

Investors give the 10 motorcycle manufacturers with more than $1 billion in annual sales a median enterprise value of 10.8 times trailing 12-month Ebitda, almost one-third better than the 8.3 multiple for the 41 equivalent carmakers.

Honda's own 8.7 times Ebitda multiple suggests investors see it as more of a middle-of-the-road carmaker than the pre-eminent global two-wheeler company.

What difference would a spin-out make? Give the median motorbike multiple to Honda's 258 billion yen of 2016 Ebitda from that unit and subtract a sum of net debt proportionate to the unit's share of assets and you'd be looking at a market capitalization of about 2.3 trillion yen, around 40 percent of the 5.8 trillion yen that the whole company is worth at the moment.

Potential market value of Honda's motorbike unit

2.3 trillion yen

The company was founded when Soichiro Honda started assembling motorized bicycles in postwar Japan and remains proud of its origins, so such a change might go against the grain. But it might also give both sides of the modern business the freedom they need to succeed.

No other major automotive company tries to straddle the worlds of two-wheelers and four-wheelers. There might be a reason for that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

To contact the author of this story: David Fickling in Sydney at dfickling@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.