Trump’s tariffs take a bit out of Honda with 42% drop in profits for past 9 months

Honda posted a 42% year-over-year decline in profit for the nine months through December to ¥465.4 billion (from ¥805.2 billion) as sales slipped 2.2% to ¥15.98 trillion, and cited U.S. tariff policy and a slowdown in the U.S. EV market as headwinds. The company maintained its full-year profit forecast of ¥300 billion, cut its 2030 global EV sales-ratio target from 30% to 20% and cancelled development of some EV models, while its motorcycle unit remained a bright spot; shares rose ~2.1% amid broader market strength following Japan’s ruling-party election victory.

Analysis

Market structure: Tariff and policy shifts materially re-weight winners toward legacy ICE producers with U.S. manufacturing and cash-generative non-EV divisions (Honda motorcycles) while penalizing EV-centric supply chains (battery makers, software-focused EV startups). Honda’s cut of its 2030 EV mix target to 20% (from 30%) is a quantified de-risking that can relieve capex needs short-term but concedes market share to Tesla/BYD over a multi-year horizon; expect downward pressure on lithium/copper demand and upward pressure on refined oil demand in the next 6–18 months.

Risk assessment: Tail risks include a tariff re-escalation back to 25% (low probability but high P&L hit), an accelerated EV adoption shock in China/Europe that makes cancelled Honda EV programs stranded assets, or a sharper-than-expected JPY selloff if Tokyo’s fiscal push forces higher JGB yields. Time buckets: immediate (days) — headline-driven volatility around earnings; short-term (3–6 months) — guidance revisions and tariff/policy updates; long-term (to 2030) — structural market-share shifts in EV adoption.

Trade implications: Favor active relative value: short HMC size 2–3% of equity risk or buy a 3-month put spread (~10%/20% OTM) to cap cost; pair trade long TM vs short HMC equal notional to capture execution/EV-differentiation (target spread mean reversion within 6 months). Reduce long exposure to lithium ETFs (e.g., LIT) by ~30% and reallocate 1–3% into XLE or large-cap energy names to hedge slower EV demand; overweight Japan tech/defense suppliers (EWJ overweight +2%) to capture fiscal stimulus.

Contrarian angles: Consensus overlooks Honda’s durable cash generation from ICE and motorcycles: if HMC equity falls >15% vs TM, accumulate up to 2% position for mean-reversion and dividend yield capture. Reaction may be overdone in options — IV on HMC spikes around earnings; consider selling short-dated iron condors to monetize premium if no fundamental surprises occur. Longer term, cutting EV models risks brand erosion with Gen-Z buyers — a stealth risk that could reverse near-term gains after 2026 as battery costs fall.

Key Decisions for Investors

• Establish a short HMC equity position sized 2–3% of portfolio equity risk or buy a 3-month put spread ~10%/20% OTM to hedge downside; set a hard stop at +8% adverse move and target a 15–25% downside within 3 months before reassessing.
• Initiate a pair trade: go long TM and short HMC equal notional (1:1) with a 6-month horizon to capture operational/EV strategy dispersion; trim if the spread narrows <‑5% or widens >12% from entry.
• Reduce exposure to lithium/EV supply-chain ETF LIT by ~30% and reallocate 1–3% of portfolio into energy exposure (XLE or top integrateds) for 3–12 months to hedge slower U.S. EV uptake and potential higher oil demand.
• Overweight Japanese tech/defense/exposed domestic GDP plays (EWJ +2% overweight) to capture Tokyo fiscal stimulus; add modest duration hedge (buy 2–5% notional protection on JGB moves via short-dated hedges) if JGB yields rise >20bps after stimulus announcements.