Why Nissan and Toyota Popped Today, but Honda Motor Dropped

There were big things happening in Japan on Wednesday as news of a potential merger by Nissan Motor (OTC: NSANY) and Honda Motor (NYSE: HMC) sent Nissan shares up by 18.5% through 2:25 p.m., but pushed Honda stock down by 3.3%. Meanwhile, investors in one automaker that these two would be teaming up to compete with, Toyota Motor (NYSE: TM), aren't one bit worried.

Toyota stock was up 2.6%.

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United against Toyota... and China

As Nikkei Asia reported last night, Nissan and Honda are discussing the creation of a new holding company that would own both automakers, allowing them to join forces to better compete with both Toyota (now the world's largest automaker) and also the slew of automakers based in China (now the biggest producer of electric cars). Nikkei specifically cited the rising power of China's BYD and its dominance in electric car manufacturing as a concern to the Japanese car companies.

Nissan and Honda may also seek to bring the smaller Mitsubishi Motors under the holding company's umbrella. Together, these companies would be producing about 8 million cars per year -- not quite as many as No. 1 Toyota or No. 2 Volkswagen, but enough to make Nissan-Honda-Mitsubishi the world's No. 3 automaker.

Putting this story in a broader context, Nikkei noted that similar mergers and less comprehensive partnerships are spreading all across the automotive world. Of particular interest, the news organization cited General Motors' (NYSE: GM) talks with Hyundai about partnering to produce EVs, the collaboration between BMW and Toyota on fuel cell vehicles, and of course Rivian's (NASDAQ: RIVN) strategic alliance with Volkswagen, which marries VW's cash to Rivian's EV software.

Image source: Getty Images.

Should you buy Nissan and Honda -- or sell them?

Of crucial importance to investors, though, is that Nissan and Honda would not be tying up here because they're winning the car wars, but rather because they've been losing ground. Through November, Nissan's sales in China declined by more than 10% while Honda's China sales slid by more than 30%. To compensate for slackening vehicle demand, Nissan has ratcheted back production by 20%, and Honda has cut its output by 10%.

Therefore, investors who buy into Nissan or Honda stock before the proposed merger will be investing in shrinking car companies, not growth companies, even if the proposed tripartite merger does end up creating the world's No. 3 automaker. And yet, I still see a way that investors might profit from this news whether a merger actually eventually happens or doesn't.

Consider: While Nissan is valued at more than 10 times earnings, pays no dividend, and is unlikely to see much sales growth for the next couple of years at least, analysts do expect its sales to revive over the longer haul. The consensus outlook is that Nissan will deliver respectable sales growth of about 13% through 2029 (compared to 2024 levels). A tie-up with (and therefore less competition from) Honda could help make that happen.

Honda's prospects look even better. Valued below 6 times earnings today, Honda pays a dividend that yields 5.3% and is projected to grow at a pretty steady rate of more than 3% annually over the next five years. Earnings per share in 2029 could be a full $1 above the $1.50 or so Honda earned in fiscal 2024.

If a merger with Nissan results in a stronger Honda brand, that would be one way for investors to profit from today's news. The fact that Honda stock is getting even cheaper Wednesday, however, despite being already pretty attractively priced, gives investors a second way to profit.

Heads, Honda merges with Nissan, and its prospects could improve. Tails, it doesn't -- but by buying now, you pick up some Honda shares at a nicer price.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.