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Honda Motor Co. Ltd. ADRs $35 – New York symbol HMC

HONDA MOTOR CO. LTD. ADRs $35 (New York symbol HMC; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) is the world’s seventh-largest carmaker.

It also makes motorcycles as well as home and garden equipment like lawnmowers and snowblowers. Japan accounts for about a third of its sales.

In its second fiscal quarter ended September 30, 2006, Honda’s earnings fell 9.2%, to $0.59 per ADR (total $1.09 billion) from $0.65 per ADR ($1.2 billion) a year earlier. (Each ADR represents one common share.)

If you exclude the effect of currency conversion, income fell 3.3%. Honda blamed the drop on losses from interest rate swap contracts.

Although profit fell, sales rose 5.7%, to $22.3 billion from $21.1 billion, thanks to strong demand for its new Civic compact car and other models. On a constant- currency basis, sales grew 12.5%.

The company is aggressively expanding in India and other developing countries where demand for small cars and motorcycles is growing fast due to rising economic prosperity.

It plans to spend $417 million on a new motorcycle plant in India, which will increase annual production by 27%. Honda also plans to double the number of cars it makes in India by end of 2007.

China is another big opportunity for Honda. It lags behind Toyota and Ford. But new models should help it reach its goal of increasing it share of China’s auto market, from 7.5% to 10%, by the end of this decade.

Like Toyota, Honda is building more cars in North America to cut its currency risk. It recently opened a new parts plant in Georgia, and plans to spend $1.2 billion on new plants in Indiana and Canada.

The company is also stepping up production of hybrid cars and other environmentally friendly engine technology. Honda feels these new products will help it close the gap with Toyota’s top-selling hybrids.

A good example is clean diesel technology. Honda recently developed a new engine that cuts harmful emissions by 95% compared with regular diesel technology. These new engines also get 30% better mileage than regular gasoline engines.

Honda aims to start selling these new cars in the U.S. by 2009. These models should also sell well in Europe, where diesel cars already account for 40% of new car sales.

Honda’s ADRs have gained 67% since we first recommended it at $21 in our June 2004 issue. It’s still attractively priced at just 13.0 times its likely fiscal 2007 profit of $2.69 per ADR. The $0.43 dividend yields 1.2%.

Honda is a buy.

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