Today's market movements saw Nissan and Toyota experiencing gains, contrasting the decline in Honda Motor's share price.
There were significant events in Japan on a Wednesday, as rumors of a potential merger between Nissan Motor (negative 1.15%) and Honda Motor (negative 0.42%) led to a 18.5% surge in Nissan shares before 2:25 p.m., but a 3.3% decrease in Honda stock. Interestingly, investors in Toyota Motor (-0.77%), a company that could potentially be rivaled by this potential collaboration, remain unfazed. In fact, Toyota shares even rose by 2.6%.
Uniting against Toyota... and China
According to Nikkei Asia's report from the previous night, Nissan and Honda are contemplating the establishment of a new holding company. This would give them the power to collaborate more effectively, enabling them to challenge both Toyota (currently the world's largest automaker) and the multitude of automakers from China (now the top producer of electric vehicles). Nissai specifically mentioned the increasing influence of China's BYD and its dominance in electric car manufacturing as a concern for Japanese car manufacturers.
Nissan and Honda might also consider incorporating the smaller Mitsubishi Motors under the holding company's umbrella. Under this arrangement, these companies would be producing approximately 8 million vehicles per year, making Nissan-Honda-Mitsubishi the third-largest automaker globally.
In a broader perspective, Nikkei highlighted that numerous mergers and less extensive collaborations are becoming common in the automotive industry. Noteworthy examples include General Motors' talks with Hyundai about working together on EVs, the cooperation between BMW and Toyota on fuel cell vehicles, and of course, Rivian's strategic alliance with Volkswagen, which combines Volkswagen's funding with Rivian's EV software.
Should you invest in Nissan and Honda -- or sell them?
Despite the potential merger, it's important to note that Nissan and Honda are entering into this alliance not because they're winning the automotive race, but rather because they've been losing ground. Through November, Nissan's sales in China declined by over 10%, while Honda's China sales dropped by more than 30%. To offset declining vehicle demand, Nissan has reduced production by 20%, and Honda has slashed its output by 10%.
Investors who purchase Nissan or Honda stock before the proposed merger will be investing in shrinking car companies, not growth companies. Even if the proposed tripartite merger results in the world's third-largest automaker, Nissan's current valuation is more than 10 times its earnings, it pays no dividend, and sales growth is unlikely in the near future. However, analysts anticipate a sales surge for Nissan in the long run, with a predicted 13% increase in sales by 2029.
Honda's prospects appear more promising. Currently undervalued at less than 6 times its earnings, Honda pays a dividend with a yield of 5.3% and is projected to see annual dividend growth of more than 3% over the next five years. By 2029, Honda's earnings per share could have increased to $1.50 or more (compared to fiscal 2024 levels).
If a merger with Nissan strengthens Honda's brand, investors could profit from this announcement. Furthermore, Honda's stock is becoming even more affordable on this particular day, despite already being attractively priced, providing investors with another opportunity to gain.
Given the potential merger between Nissan and Honda, investors might be interested in discussing the impact on their financial strategies. This merger could be seen as an opportunity to diversify investment portfolios, as it aims to challenge larger competitors like Toyota and the growing number of automakers from China.
However, it's crucial to consider the financial health of both companies before making an investing decision. For instance, while Honda's current valuation is relatively low and it pays dividends, Nissan, on the other hand, has a high valuation with no dividend payout and uncertain sales growth in the near future.
