Toyota Motors (NYSE:TM) will announce its fourth quarter and full year earnings on May 8. The stock has sizzled in the last six months, gaining more than 40%, as investors expect a weak yen to boost the profits of the world’s largest automaker. Toyota’s net margins of <2% are one of the lowest in the industry and a weak yen certainly bodes well for its profitability. The automaker has already upped its net income guidance for fiscal 2013 (April’12 – March’13) to a whopping 860 billion yen (~$9 billion) at the end of the third quarter. 
A weak domestic currency will benefit Toyota since it manufactures almost half of its vehicles in Japan. The automaker’s overseas profits will swell when translated back to the local currency. It will also give the company greater flexibility to maneuver its product prices to adjust to changing market dynamics. The yen devaluation comes at a good time for Toyota as there are concerns mounting over its performance in the U.S., China and even Japan. These markets make up close to 70% of the automaker’s unit sales.
After a strong 2012, Toyota’s growth has cooled off in North America. Although the unit sales in the U.S. are up 6.1% through April, the last couple of months has seen some weakness.  Part of the reason why the American sales have slowed is because the Camry and the Corolla are now being outsold by the Accord and the Civic, respectively. Both of these cars were refreshed by Honda last year and that seems to have reinvigorated the popularity of these models among the American public.
Japanese automakers’ sales in China have suffered since late last year after tensions arose between the two countries over ownership of the disputed islands. The anti-Japanese sentiment still lingers on among the general public which is continuing to impact sales of Japanese car companies.
Toyota, which earlier forecast its sales to normalize by the middle of the year, now expects the sales to recover not before fall this year. The automaker’s sales were down 6.7% in April after they slid 11.7% in March.  But Toyota is determined to raise its sales in China as the market is just too important to ignore. It displayed a record 52 models (including two China specific ones) at the recently concluded Shanghai auto show.
Meanwhile, General Motors (NYSE:GM), the market leader in China with 15.1% share in the first quarter, is piling on investments in China. It is investing a jaw dropping $11 billion in the world’s most populous nation that includes building new plants, introducing new models, a renewed push of its Cadillac brand and expanding the dealer networks.  Even Ford Motors (NYSE:F) is doing very well with sales up 54% through March. Thanks to its new models Kuga and Focus, its sales are shooting up in a country in which it traditionally has had a very limited presence. Ford now outsells Toyota in China. 
Japan’s automobile market was artificially boosted in 2012 with the help of government incentives. Now that the subsidies have ended, the automobile market is expected to decline this year. The automaker forecasts its Japanese sales to fall as much as 20% in 2013.
The political tensions between Japan and China leave the automaker in a disadvantaged position. Unless Toyota is able to successfully address ongoing concerns in some of its biggest markets, the current stock rally looks too aggressive.
We currently have a $105 price estimate for Toyota’s stock, which is in line with the current market price.Notes:
- TM Q3 Earnings [↩]
- U.S. auto sales,wsj.com [↩]
- Toyota says April China auto sales down 6.5pc year-on-year, May 6, 2013, brecorder.com [↩]
- GM’s China Bet Mimics Toyota’s Bet on U.S. Last Century, April 30, 2013, bloomberg.com [↩]
- Ford China sales rise 65% on year in March, April 9, 2013, marketwatch.com [↩]