Can Yamaha Motor Reverse Its Skid?

Japan's Yamaha Motor (OTCPK:YAMHF) has some work to do. Yamaha Motor is the second-largest motorcycle manufacturer in the world, and the largest manufacturer of outboard marine motors, but the company has been struggling to generate profits in the developed world while seeing its primary rival Honda Motor (HMC) grab share in key emerging markets.

Yamaha Motor isn't giving up without a fight. The company has been aggressively refreshing its product lineup in both North America and the emerging markets, and is intensifying its marketing efforts in key areas like Indonesia and India. If Yamaha Motor can reverse its share losses and shore up profitability in the developed world, the shares could post some very solid gains from here.

Readers should note that the Yamaha Motor ADR isn't as liquid as investors might like. I would advise those interested in buying the shares to buy the Japanese shares if possible, or at least use limit orders if going with the ADRs.

Big In Bikes … But Not Big Enough

Yamaha Motor is the second-largest motorcycle manufacturer in the world, but that hasn't brought prosperity for the company. Motorcycles are about two-thirds of company sales, but less than one-quarter of operating profits. Worse still, the company has not made a profit from its sales to the developed market (that is, Japan, North America, and Europe combined) in over six years.

More recently, Yamaha Motor's performance in its emerging markets has become a cause for worry as well. The company has been losing share to Honda in both Vietnam and Thailand, with Honda now holding roughly 75% share in Thailand. Worse yet is the situation in Indonesia. Indonesia is an enormous market for Yamaha Motor - buying nearly 40% of the motorcycles Yamaha Motor produces and contributing nearly one-third of the company's revenue - but the company's share peaked at almost 50% in 2009 and has seen slid into the 30%'s as Honda's has climbed to around 60%.

Yamaha Motor is not blind to its problems. The company under-innovated and saw Honda grab share with appealing new designs/models and aggressive marketing efforts. Now the company is fighting fire with fire, freshening up its product line up in key markets and strengthening its marketing efforts in key markets like Indonesia. Management is also looking to make a bigger splash in India - while India represents about 8% of the company's unit demand, they only have about 5% market share.

Management is also hoping for better results from the U.S. and European markets. The U.S. motorcycle / motorbike market hasn't been in the good shape; even with some better quarters recently, annual industry units are only running about half the rate of 2003 to 2007. Yamaha Motor has been investing heavily in R&D and new product development for the 2015 and 2016 model years (launching from the fall of 2014), and those should drive some share gains against Honda, Suzuki (OTCPK:SZKMY), and Kawasaki (OTCPK:KWHIY). As an aside, Yamaha Motor doesn't really compete with Harley-Davidson (HOG) or the Victory and Indian brands of Polaris (PII) in heavyweight motorcycles.

As for Europe, it seems as though the focus is more on stemming losses. New high-end models like the MT-09 and MT-07 will help, but about half the European business is in scooters, and that market is not particularly strong right now. The best hope for Yamaha Motor here, then, may be in significantly reducing its losses and pushing toward breakeven as opposed to really making money.

Looking To Turn Around Marine And ATVs

Yamaha Motor's marine business is still in solid shape, as the company has around 40% global share and 45% share in North America, despite competition from Brunswick (BC), Honda, and Suzuki. Moreover, this is an exceptionally profitable business for Yamaha Motor, contributing less than 20% of sales but more than half of the company's operating profit.

The problem in marine is the market itself. Demand for marine pleasure craft plunged from 2007 to 2009 and only recently started to recover. With sales of outboard engines about 40% below the prior peak, there's definitely room for recovery here, but it doesn't look like it's going to happen soon.

The ATV market is a more challenging one. Yamaha Motor had a strong position here once, but lost share as numerous product liability suits distracted management and led to underinvestment in new models. Now the company has around 15% share in a North American market that Polaris dominates. New recreational off-road vehicles (also known as ROVs) like the Viking may help restore market share, but Yamaha Motor is going to have its work cut out taking share back from Polaris without an aggressive investment in marketing.

Better Sales, Better Margins?

The goal for Yamaha Motor is pretty straightforward - reverse share losses in the crucial Indonesian motorcycle market (and better results in Thailand and Vietnam would help too!), improve profits from North America and Europe, and hope for better results in marine and ATVs, while cutting costs by streamlining the supply chain and developing more products on common platforms. That all sounds nice, but actually doing it is the real trick, particularly as launching over 200 new models between 2013 and 2015 will put a lot of demands on the supply chain, manufacturing, and marketing capabilities of the company.

I'm optimistic, though, and I see the potential for Yamaha Motor to grow its sales at a long-term rate of almost 6%. I also see a path toward better margins that can underpin a return to positive free cash flow. I'm not looking for strong or impressive free cash flow margins, but even something on the order of 3% or 3.5% would support a fair value of more than ¥1,900 per share and a 20% move in the shares from here. An EV/EBITDA approach is not quite as bullish for the shares (suggesting a fair value closer to ¥1,800), but that's due in part to the fact that only some of the company's self-improvement will hit the financial results in 2014.

The Bottom Line

It is not going to be easy for Yamaha Motor. Honda is an exceptionally well-run company, particularly in the Southeast Asian motorcycle markets. Likewise, Polaris is not going to be a pushover in the U.S. ATV market. Working in Yamaha Motor's favor is a good legacy of product design and strong recent innovations (particularly in their engines). It may not be completely fair to say that the company was asleep at the switch in recent years, but I do believe a renewed focus on product design and marketing will produce results. With that, Yamaha Motor is a potential turnaround in the making that is still largely doubted by sell-side analysts and undervalued by the market.

Source: Can Yamaha Motor Reverse Its Skid?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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