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TM or HMC: Which Japanese Auto Giant is the Better Bet?
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As Japan’s auto industry recovers modestly, the focus is on its two largest players, Toyota (TM - Free Report) and Honda (HMC - Free Report) . While Toyota's stock is down 4% and Honda has lost 16% year to date, both have outperformed the industry’s 19% decline.
As the industry undergoes a transformation toward electrification and sustainability, both companies are adjusting their strategies to maintain a competitive edge. With Japan’s GDP rebounding and vehicle demand recovering globally, Toyota and Honda stand poised to capitalize on these tailwinds, particularly in their hybrid stronghold. Supportive policies under Prime Minister Ishiba Shigeru, aimed at boosting domestic demand and corporate investment, should create a favorable economic backdrop.
Let’s dive into the prospects of these automotive titans to determine which one might hold the upper hand for investors.
YTD Price Performance Comparison
Image Source: Zacks Investment Research
The Case for Toyota
With market capitalization exceeding $200 billion, Toyota is one of the world's largest automakers by sales volume. Its robust brand portfolio — including Lexus and Toyota — has solidified its dominance in the global market. TM has been a pioneer in hybrid technology since the introduction of the Prius in 1997, and it continues to lead in this segment. Toyota's hybrid lineup, featuring popular models like the RAV4 Hybrid and Camry Hybrid, positions it strongly in the growing market for fuel-efficient vehicles. With hybrids now comprising 35-40% of Toyota’s sales — up from just 9% in 2018 — TM expects these to exceed 50% of its total volume next year, securing its leadership in an evolving market.
While Toyota has been cautious in its approach to battery electric vehicles (BEVs), it has lately accelerated its efforts. The company plans to launch several new BEV models in the coming years and targets selling 1 million zero-emission vehicles annually by 2026.
Although Toyota has ambitious plans for EVs, it sold only 104,000 units last year (less than 1% of its total sales), highlighting its slower pace in the BEV market compared to peers. The transition is costly, with R&D and capital expenditures expected to reach ¥3.45 trillion in fiscal 2025, putting pressure on near-term profitability.
In the last reported quarter, Toyota’s operating profit plunged 20% year over year to 1.16 trillion yen, marking the first decline for the company in two years. Operating income is projected to decline 19.6% year over year to ¥4.3 trillion in fiscal 2025. Rising debt levels are also concerning. The company’s long-term debt reached ¥21.6 trillion as of Sept. 30, 2024, with a debt-to-capitalization ratio of 52%, higher than the industry average of 48%.
Despite these headwinds, Toyota’s investor-friendly policies are praiseworthy. The company paid a total dividend of 75 yen per share in fiscal 2024, up from 60 yen in fiscal 2023. For fiscal 2025, Toyota has raised its dividend forecast to 90 yen per share. Over the past five years, dividends have grown at an annualized rate of 4.72%.
On the valuation front, TM’s forward earnings multiple sits at 7.61X, lower than the industry and its own 5-year median.
Image Source: Zacks Investment Research
While the Zacks Consensus Estimate predicts a 15% decline in fiscal 2025 EPS, fiscal 2026 estimates suggest a rebound with a 10.6% increase. Its EPS estimates have moved south for fiscal 2025 and 2026 over the past seven days.
Image Source: Zacks Investment Research
The Case for Honda
With a market capitalization of over $50 billion, Honda's portfolio spans automobiles, motorcycles, and power equipment. Sales volumes from Honda’s motorcycle segment are projected to grow 7% in fiscal 2025.
Honda’s CR-V and Accord hybrids are among the bestselling hybrid models in the U.S. market. The company’s plans to double hybrid production to 2 million units annually by 2030 strengthen its competitive edge. Strategic partnerships with LG Energy and GS Yuasa are expected to accelerate its EV ambitions by building an integrated supply chain and reducing production costs.
HMC’s ambitious goal for 100% EV and FCEV sales by 2040 showcases its long-term vision. Its upcoming "0 Series" EVs in North America, along with plans to launch 10 new models in China by 2027, highlight its aggressive expansion in key markets. Innovations like the N-VAN e: and micro-mobility products further enhance Honda’s competitive edge.
However, challenges persist. Honda's Power Products segment remains a drag, with fiscal 2024 revenues falling due to a 32.5% drop in unit sales. This trend is expected to continue, with another 4% decline projected for fiscal 2025. Rising debt levels also warrant caution, with long-term debt increasing to ¥6.25 trillion as of Sept. 30, 2024, from ¥6 trillion six months earlier. Honda’s R&D expenses, anticipated to rise to ¥1.19 trillion in fiscal 2025, further strain profitability.
Like Toyota, Honda remains committed to increasing shareholders’ returns via dividends and stock buybacks. Over the past five years, dividends have grown at an annualized rate of 4.6%.
On the valuation front, HMC’s forward earnings multiple sits at 5.88X, lower than the industry and its own 5-year median.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for HMC’s fiscal 2025 and 2026 EPS suggests a decline of 5% and 1.5%, respectively. While its EPS estimates have moved south for fiscal 2025 over the past seven days, the same have risen for fiscal 2026.
Image Source: Zacks Investment Research
Conclusion
Toyota’s leadership in hybrid technology and its ambitious electrification plans position it well for long-term growth, but its slower BEV progress and rising costs weigh on near-term performance. On the other hand, Honda’s diversified revenue streams and aggressive EV roadmap demonstrate promise, though its Power Products segment and rising debt are notable weaknesses.
Valuation metrics for both companies are attractive, with Honda presenting a slightly cheaper entry point. However, downward EPS revisions for fiscal 2025 reflect challenges for both automakers in the near term. With both stocks carrying a Zacks Rank #3 (Hold), investors may find it prudent to stay on the sidelines until clearer catalysts emerge.
Image: Bigstock
TM or HMC: Which Japanese Auto Giant is the Better Bet?
As Japan’s auto industry recovers modestly, the focus is on its two largest players, Toyota (TM - Free Report) and Honda (HMC - Free Report) . While Toyota's stock is down 4% and Honda has lost 16% year to date, both have outperformed the industry’s 19% decline.
As the industry undergoes a transformation toward electrification and sustainability, both companies are adjusting their strategies to maintain a competitive edge. With Japan’s GDP rebounding and vehicle demand recovering globally, Toyota and Honda stand poised to capitalize on these tailwinds, particularly in their hybrid stronghold. Supportive policies under Prime Minister Ishiba Shigeru, aimed at boosting domestic demand and corporate investment, should create a favorable economic backdrop.
Let’s dive into the prospects of these automotive titans to determine which one might hold the upper hand for investors.
YTD Price Performance Comparison
The Case for Toyota
With market capitalization exceeding $200 billion, Toyota is one of the world's largest automakers by sales volume. Its robust brand portfolio — including Lexus and Toyota — has solidified its dominance in the global market. TM has been a pioneer in hybrid technology since the introduction of the Prius in 1997, and it continues to lead in this segment. Toyota's hybrid lineup, featuring popular models like the RAV4 Hybrid and Camry Hybrid, positions it strongly in the growing market for fuel-efficient vehicles. With hybrids now comprising 35-40% of Toyota’s sales — up from just 9% in 2018 — TM expects these to exceed 50% of its total volume next year, securing its leadership in an evolving market.
While Toyota has been cautious in its approach to battery electric vehicles (BEVs), it has lately accelerated its efforts. The company plans to launch several new BEV models in the coming years and targets selling 1 million zero-emission vehicles annually by 2026.
Although Toyota has ambitious plans for EVs, it sold only 104,000 units last year (less than 1% of its total sales), highlighting its slower pace in the BEV market compared to peers. The transition is costly, with R&D and capital expenditures expected to reach ¥3.45 trillion in fiscal 2025, putting pressure on near-term profitability.
In the last reported quarter, Toyota’s operating profit plunged 20% year over year to 1.16 trillion yen, marking the first decline for the company in two years. Operating income is projected to decline 19.6% year over year to ¥4.3 trillion in fiscal 2025. Rising debt levels are also concerning. The company’s long-term debt reached ¥21.6 trillion as of Sept. 30, 2024, with a debt-to-capitalization ratio of 52%, higher than the industry average of 48%.
Despite these headwinds, Toyota’s investor-friendly policies are praiseworthy. The company paid a total dividend of 75 yen per share in fiscal 2024, up from 60 yen in fiscal 2023. For fiscal 2025, Toyota has raised its dividend forecast to 90 yen per share. Over the past five years, dividends have grown at an annualized rate of 4.72%.
On the valuation front, TM’s forward earnings multiple sits at 7.61X, lower than the industry and its own 5-year median.
While the Zacks Consensus Estimate predicts a 15% decline in fiscal 2025 EPS, fiscal 2026 estimates suggest a rebound with a 10.6% increase. Its EPS estimates have moved south for fiscal 2025 and 2026 over the past seven days.
Image Source: Zacks Investment Research
The Case for Honda
With a market capitalization of over $50 billion, Honda's portfolio spans automobiles, motorcycles, and power equipment. Sales volumes from Honda’s motorcycle segment are projected to grow 7% in fiscal 2025.
Honda’s CR-V and Accord hybrids are among the bestselling hybrid models in the U.S. market. The company’s plans to double hybrid production to 2 million units annually by 2030 strengthen its competitive edge. Strategic partnerships with LG Energy and GS Yuasa are expected to accelerate its EV ambitions by building an integrated supply chain and reducing production costs.
HMC’s ambitious goal for 100% EV and FCEV sales by 2040 showcases its long-term vision. Its upcoming "0 Series" EVs in North America, along with plans to launch 10 new models in China by 2027, highlight its aggressive expansion in key markets. Innovations like the N-VAN e: and micro-mobility products further enhance Honda’s competitive edge.
However, challenges persist. Honda's Power Products segment remains a drag, with fiscal 2024 revenues falling due to a 32.5% drop in unit sales. This trend is expected to continue, with another 4% decline projected for fiscal 2025. Rising debt levels also warrant caution, with long-term debt increasing to ¥6.25 trillion as of Sept. 30, 2024, from ¥6 trillion six months earlier. Honda’s R&D expenses, anticipated to rise to ¥1.19 trillion in fiscal 2025, further strain profitability.
Like Toyota, Honda remains committed to increasing shareholders’ returns via dividends and stock buybacks. Over the past five years, dividends have grown at an annualized rate of 4.6%.
On the valuation front, HMC’s forward earnings multiple sits at 5.88X, lower than the industry and its own 5-year median.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for HMC’s fiscal 2025 and 2026 EPS suggests a decline of 5% and 1.5%, respectively. While its EPS estimates have moved south for fiscal 2025 over the past seven days, the same have risen for fiscal 2026.
Image Source: Zacks Investment Research
Conclusion
Toyota’s leadership in hybrid technology and its ambitious electrification plans position it well for long-term growth, but its slower BEV progress and rising costs weigh on near-term performance. On the other hand, Honda’s diversified revenue streams and aggressive EV roadmap demonstrate promise, though its Power Products segment and rising debt are notable weaknesses.
Valuation metrics for both companies are attractive, with Honda presenting a slightly cheaper entry point. However, downward EPS revisions for fiscal 2025 reflect challenges for both automakers in the near term. With both stocks carrying a Zacks Rank #3 (Hold), investors may find it prudent to stay on the sidelines until clearer catalysts emerge.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.