Honda Motor (NYSE: HMC) (OTCPK: HNDAF) stock is going to drop 66% at the open today. HMC stock falling like this is not some reaction to the UAW strike, nor in fact anything to do with the operating business, not directly. And it’s also worth noting that the strike has a beneficial effect on Honda’s non-union operations in the US - they’re producing while the Big Three aren’t. No, this is a purely technical change, not a real price move at all. Also, it’s a product of recent success for Honda Motors, not a sign of weakness.
We all do know what goes on at Honda: “Honda Motor Co., Ltd. develops, manufactures, and distributes motorcycles, automobiles, power, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product and Other Businesses.” As we can see from the HMC stock price chart that collection of businesses has been doing well.
Honda Motor stock price from Google Finance
That’s the “problem” that management wants to solve here. For different stock markets have different ideas of what the “right” price range for a decent stock is. For a major industrial, London thinks that £1 to £10 is about right. New York thinks that $10 to $100 is. Over that and it’s “expensive” under it’s “cheap”. That’s cheap as in the sense of not a solid stock that we want to be investing in. Now, of course, this is all humans and our susceptibility to the numbers illusion but it’s a strong enough failing that real, hard headed, businessmen think it worthwhile paying attention to. So, a certain amount of management is devoted to keeping the stock in those sorts of ranges.
This is complicated by the way that Honda is quoted on many different markets. It’s not possible to be in the sweet spot on all of them at the same time.
Still, the assumption being made is that the Hond stock price is “too high”. Therefore something must be done to lower it and thereby make it look more reasonably priced. That something is a stock split. Simply declare one old share to now be three new ones, a three for one forward stock split: “Decided to split one share of common stock into three shares to expand the investor base by reducing the Company's stock price per investment unit.” The news shares start trading today.
This doesn’t, not directly, affect the overall value of Honda Motors, just the number of shares that make it up. So, the stock price should react mechanically, down 66%, or to one third of the earlier value.
Now, whether this does in fact increase the marketability of HMC stock is another matter. But don’t panic if you see that your Honda stock is down two thirds today. You’ve also got three times as many shares as you thought you had.
