Mazda Motor: Spotlight On Organizational Change & North American Market (Upgrade) (MZDAY)

Elevator Pitch

Mazda Motor Corporation (OTCPK:MZDAY) [7261:JP] shares are assigned a Buy investment rating. In my January 2, 2024, initiation article, I wrote about MZDAY’s sales outlook for the China market and the company’s electrification transition.

My decision is to revise my rating for Mazda Motor from a Hold previously to a Buy now. I have turned bullish on Mazda Motor, after considering the company’s recently announced organizational changes and its latest monthly sales numbers for the North American market.

The company’s shares can be bought or sold on the Japanese equity market and the Over-The-Counter market. The liquidity of Mazda Motor’s OTC shares is decent with a mean daily trading value of around $800,000 (source: S&P Capital IQ) for the last three months. As a comparison, the average daily trading value of Mazda Motor’s shares traded on the Tokyo Stock Exchange for the past three months was approximately $50 million. US stockbrokers like Interactive Brokers with foreign markets access will allow their clients to trade in Mazda Motor’s Japanese shares.

Latest Organizational Changes Will Take Effect In April

At its most recent Q3 FY 2024 (October 1, 2023 to December 31, 2023) earnings call, the company stressed that “one of the most important things we are doing at Mazda this year is to set up our organization for future success.” In specific terms, Mazda Motor highlighted at its latest quarterly results briefing that it aims to make “enhancements to our organization structure” to improve “customer focus and employee engagement.”

In the earlier part of this month, Mazda Motor published a press release detailing its new “organizational and personnel changes” which will come into effect at the beginning of April 2024.

Changes To The Roles Of Selected Members Of Mazda Motor’s Management Team

As per the chart presented above, a few of Mazda Motor’s executive officers were previously wearing multiple hats and had additional responsibilities relating to “cost innovation.” These include management team members who were in charge of “sales and product”, and the company’s Chief Technology Officer or CTO. At the start of April this year, these selected executive officers will be able to focus more on their respective primary roles and help to drive Mazda Motor’s future revenue growth, product development, and technology development.

Mazda Motor’s Specific Organizational Changes Relating To Costs

Separately, Mazda Motor has plans to implement organizational changes to create new systems tracking developments which can impact “the cost of automobiles” and assisting suppliers in the areas of “quality and productivity improvement” as per its March 11 press release. It is reasonable to assume that the company is stepping up efforts to manage its expenses in a more proactive manner.

Read-Throughs From Third Quarter Results

It is relevant to analyze Mazda Motor’s proposed organizational changes in light of the company’s most recent quarterly financial performance.

As per data sourced from S&P Capital IQ, Mazda Motor’s revenue expanded slightly by +1.9% QoQ in Q3 FY 2024 (YE March 31, 2024), which was marginally or +1.3% higher than the consensus top line estimate. The company’s EBIT margin contracted from 8.1% in Q2 FY 2024 to 5.7% for Q3 FY 2024, and that was about -0.8 percentage points below the consensus operating margin forecast.

Mazda Motor’s latest quarterly top line performance was decent, but the company’s revenue growth didn’t surprise the market in a big way. As such, there is room for MZDAY to devote more time and energy to new product development and sales management to boost its future revenue. This explains why Mazda Motor is narrowing the job scope and reducing the responsibilities for its key management team members like the Chief Technology Officer as mentioned earlier.

Also, it makes a lot of sense for Mazda Motor to place a greater emphasis on expense management with its organizational changes. Mazda Motor’s actual Q3 FY 2024 EBIT margin fell short of expectations, which is largely attributable to a JPY17.6 billion increase in “fixed costs” driven by higher “quality costs for our prompt quality actions” as indicated at its analyst briefing Q&A session. This means that it is pertinent for the company to cut costs and improve its profitability going forward with the necessary organizational changes as detailed in the preceding section.

Recent Sales Numbers For North American Market Were Good

Mazda Motor’s sales volume for the US market grew by a significant +14% YoY in the third quarter of fiscal 2024, and the US market represented around 29% of the company’s most recent quarterly sales volume. The North American region, which includes Colombia, Mexico, Canada, and the US, accounted for an even larger 41% of MZDAY’s Q3 FY 2024 sales volume.

There are good reasons to believe that the US (and North America as a whole) will remain a very important growth market for Mazda Motor in the near term. At the company’s Q3 FY 2024 briefing Q&A session, Mazda Motor outlined its expectations that “total demand in the U.S. is expected to rise” in the new year, while its “growth in total demand will be quite limited” for “other major markets.”

The company’s North American and US businesses continues to exhibit positive sales growth momentum based on the latest available data. The company’s business unit for North America (US, Colombia, Mexico, and Canada), otherwise known as “Mazda North American Operations”, saw its sales volume for January and February 2024 combined grow by an impressive +17.5% YoY. The number of units sold by Mazda North American Operations for February this year was also a new historical high.

Key Risk Factors

Mazda Motor has certain risk factors that investors should consider.

One risk factor is the actual impact of MZDAY’s proposed organizational changes is not as good as what investors would have hoped for. There are potential benefits associated with the organizational changes mentioned earlier in this article like a greater focus on product development and a reduction in costs. But execution is key, and there is the possibility that the company’s organizational changes don’t deliver the desired results.

Another risk factor is that US automotive demand turns out to be weaker than what the market and the company expect. As indicated above, Mazda Motor views the US market as an important growth engine. As such, it is reasonable to assume that MZDAY’s future financial performance for the company as a whole might fall short of expectations, if its US sales weaken going forward.

Concluding Thoughts

Mazda Motor is now trading at undemanding consensus next twelve months’ price-to-sales, EV/EBITDA, and EV/EBIT multiples of 0.22 times, 2.5 times, and 3.4 times (source: S&P Capital IQ), respectively. I think that MZDAY’s future financial performance can surprise on the upside and drive a positive re-rating of the stock’s valuations, considering its latest organizational changes and the strong year-to-date sales for its North American business.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.