Toyota Prius Crash Test
The Wall Street Journal is reporting that today Honda (HMC) is widening its 2008 airbag recall to include over 826,000 Honda and Acura vehicles. The vehicles affected are model years 2001-2002, and cross the broad spectrum of vehicles sold by the company. Add this to the well publicised woes that are currently plaguing Toyota (TM), and one could easily ask the question: What has happened to legendary Japanese reliability?
In the eyes of the general public, the main selling point for both these manufacturers is their reliability. Ask a Honda or Toyota owner about how long they expect their vehicle to remain on the road, and most likely their answer will run in the hundreds of thousands of miles. High profile recalls, especially involving a critical part of the car, can damage a carmakers reputation for years. Ask any of the American automakers. Just from looking at this timeline (from Time magazine), one can see that in the last decade the Big Three Detroiters accounted for 5 of 7 large recalls. Their reputation for reliability took a hammering during this time, and their sales suffered greatly. It would not be a stretch to say that this was one of the main reasons for the recently abysmal performance of Ford, GM, and Chrysler.
However, the Japanese recalls present a fantastic opportunity for these three companies to realign themselves with the idea of a quality product. They have already been making massive strides. GM brand Cadillac came third in the JD Power Initial Quality Study for 2009, Ford was 9th and Chrysler was 10th. All companies handsomely beat the market average. And from crisis comes opportunity. Chrysler has created offers and discounts for people who trade in Toyota vehicles.
So as an investor, is this “crisis” actionable? Long term Toyota shareholders should be furious at the company’s management. Their response to the recall was lackluster at best, damaging at worst, and the stock has lost about 23% of its value. The drop seems to have stabilized as “knife-catchers” try to time the bottom, but more pain could be ahead during the Senate hearings. My advise is to hold. For Honda shareholders, I would actually recommend selling. The stock has held up well during the Toyotapocalypse, but the valuation is a bit high and this new news could set off a round of fear-induced selling. Since Ford (F) is the only tradable component of the (Not-So) Big Three, we shall discuss them, and I think they present an interesting opportunity. Certainly there is a lot of optimism built into the stock, but it holds a lower PE than Honda and Ford is absolutely the strongest of the Americans. I’m not sure I can overwhelmingly suggest a buy, but it is certainly worth buying on any dips.
-AH
Disclosure: Long HMC, Proud owner of several (non-recalled!) Hondas, Long the market.
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