Honda Motor Corp. (NYSE:HMC) racked up strong profits on a surge in auto sales in its second quarter. The automaker had strong sales both in the U.S. and Japan, and raised the forecast for its full year.

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Honda's Quarter
For its second quarter in fiscal 2011, Honda sold 898,000 automobiles, an increase of 7%. Honda's revenue increased 13.5% in North America and 16% in Japan. Total revenue was up 9.5% overall, to $26.85 billion, up from $24.5 billion a year ago. Net income was $1.62 billion (90 cents per share), an increase from $644.8 million or 36 cents a share in the year ago quarter. Honda's strong earnings report follows Ford Motor's (NYSE:F) strong earnings report of last week, as the auto industry continues to gradually recover from the recession.

Behind the Numbers
Honda cited its capital expenditure cuts, an improved product mix as well as increased production as all contributing to the increased earnings. In addition to its robust auto sales, Honda also posted strong motorcycle sales, as it sold 2.73 million, and had a 23.6% increase in sales in its power-products division. Overall revenue in Asia was higher, but European revenue was a soft spot, as sales fell by 26%. The strong quarter's overall sales led the company to forecast a 10% increase in profit for the year, despite projections of lower revenue increases for its year ending in March, 2011. Revenue is expected to increase 4.9% to $107.39 billion, instead of the earlier projection of 6.1% of $108.59 billion.

Auto Industry Grows More Competitive
Ford's recent earnings report highlighted its gains in market share, among other positives. The auto industry has been roiled in the last few years by the significant changes in the fortunes of the U.S. automakers as well as the increasing vigor of foreign competitors. Yet, thriving automakers such as Honda and Toyota Motors (NYSE:TM) are pressured, too.

Honda is entering the electric car parade, for example, as it will be introducing its prototype this month. Nissan (OTC:NSANY) is following Toyota's Prius hybrid with its all-electric Leaf. The future of all-electrics, such as what tiny Tesla Motors (Nasdaq:TSLA) is banking on completely, is anyone's guess. Yet all-electrics, not just hybrids, is a product area that most automakers have to enter, if only because the other companies are doing so.

Hyundai Looms
Electric cars and hybrids aside, the fight for market share is getting more crowded by the changing strengths of the companies. Privately owned South Korean automaker Hyundai, which recently posted a quarterly profit of $1.2 billion, is a serious player in the global market. Its U.S. sales increased 19% in 2009, while its affiliated company, Kia Motors, grew sales 12% in the U.S. Hyundai is making well-built, nicely styled cars that are moderately priced, something of a reprise of the Toyota formula of previous decades. How well Hyundai continues to build its strength will determine how much of a long-term challenger it will be in the global auto market.

Honda's Outlook
The projected profit increase for Honda's fiscal 2011 is a positive sign; the lower revenue increase, not as much. Honda, like most of the automakers, is still clawing back toward pre-recessionary numbers. While its earnings and revenues improve, the company's balance sheet is fairly healthy. Honda has more than $15 billion in cash and cash equivalents, an increase from the roughly $11 billion it had last year. Honda's long-term debt is slightly more than $36 billion, though its cash flow from operations was down to $8 billion from $11.6 billion in the first half of its fiscal 2011.

The Bottom Line
The stock trades at a 21.6 P/E but a forward multiple of only 12. Investors need to focus carefully on the fundamentals of the auto business, such as unit sales and market share. Honda's in the mix to be considered, but we'd wait to see quarter-to-quarter if it can keep rolling along and sustain these gains. (For related reading, see Analyzing Auto Stocks.)

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