Toyota Motors (NYSE:TM) is scheduled to announce its first quarter earnings on August 2. During the year-end earnings reported earlier in May, the automaker laid out an optimistic guidance of selling 10.1 million vehicles in the current fiscal (April’13 – May’14). If Toyota meets its own guidance, it will be the first time any automaker breaches the 10 million mark.
The yen’s movement against the dollar has a huge impact on Toyota’s profitability. After briefly testing the 95 yen mark, the dollar is back closer to a 100 yen now. A weak yen swells the overseas profits earned by Toyota. In fact, Toyota expects operating margins to exceed 7.5% in fiscal 2014. This will be a significant improvement from the 6% mark posted in the previous fiscal.
Shares of the world’s largest automaker have gained more than 30% this year although they have traded in a narrow range lately. The surge in the stock price illustrates how the Japanese automaker has rebounded after years of hardship caused by the global recession, the unfortunate natural disaster and a strong yen.
Although Toyota’s American sales have gained 6% through June, the Corolla has fallen in the pecking order with the Civic outselling the vehicle for two months consecutively. The Focus and the Elantra are breathing down its neck as well.  On the other hand, the second half of the year could be better as the automaker prepares to debut its Corolla 2014 version. The Corolla is responsible for about a sixth of Toyota’s American sales, so any improvement in its sales is going to impact overall sales as well.
The success of the new Corolla is all the more important for Toyota now that the Camry isn’t selling as briskly as it used to. Although Camry continues to be the best selling car in the U.S., its sales are down 2.9% in the first half of the year. The refreshed version of Camry isn’t going to be out anytime soon either.
The fact that most of the sales gains in the American automotive market are coming from light trucks and pickups, an area where Toyota has had a weak presence traditionally, could be a dampener for the automaker. The rebounding U.S. housing market is fueling the growth of pickups as they are used extensively in construction activities.
Uncertainty In China
After tensions broke out between China and Japan last year, Japanese brands have fallen out of favor with the Chinese public. The anti-Japanese sentiment still lingers on among the general public, and this continues to impact sales of Japanese car companies. Honda’s sales turned negative in June after posting some gains in May.
But Toyota seems to be one of the more stable Japanese companies in China. It posted positive sales growth for two consecutive months. Sales in June were up 9% although they’re down 5.8% in the first half.  China is going to remain tricky in the near term.
Weak Japanese Data
Back home, Toyota will have a tough year as overall Japanese sales are expected to remain tepid this year. 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.
In the first half of the year, the passenger car market is down 8.5% with Toyota’s sales declining 13% .  Japan accounts for about a fourth of Toyota’s sales, so a weak performance on its home turf could erode some of the automaker’s profit.
Due to aforementioned reasons, we are a little skeptical about giving too much premium to the stock. For now, we have a $110 price estimate for Toyota’s stock. We’ll revise our price after the first quarter earnings are out.Notes: