Weak Yen Lifts Toyota’s Profits But Unit Sales Remain Stagnant

Toyota Motors (NYSE:TM) continued its tradition of announcing strong quarterly numbers as a weak yen lifted the automaker’s profits. Total revenues for the quarter jumped 16% to 6,282 billion yen ($~64 billion) while the operating income swelled 74% to 592 billion yen ($6.1 billion). The net income stood at 438 billion yen (~$4.5 billion), or 138.3 yen per share vs 81.5 yen per share in the previous year quarter. ^[1]

Toyota’s profits swelled even though it sold fewer vehicles. In the latest quarter, the automaker sold 2.24 million vehicles, down 0.5% from the previous year quarter. The results are similar to the first quarter, when Toyota’s profits doubled despite selling fewer cars.

We have a $123 price estimate for Toyota, which is about 5% lower than the current market price.

Guidance Revision

For fiscal year 2014, Toyota now expects revenues to total 25,000 billion yen (~$255 billion), up from the previous guidance of 24,000 billion yen (~$245 billion). Similarly, the net income should rise to a massive 1,670 billion yen (~$16.4 billion). During the previous earnings release, Toyota expected a net income of 1,480 billion yen (~$14.5 billion). The automaker kept its unit sales forecast unchanged at 10.1 million units. ^[1]

Weak Yen Benefiting Toyota

One of the reasons why Japanese companies are raising their earnings guidance is because of a conservative forex rate assumption in the preceding quarters. The companies had generally assumed the dollar-yen exchange rate in the range of 92-95. But the exchange rate has consistently hovered in the range of 97-100. A weak currency is beneficial since the overseas profits translate back to more yen.

The fact that Toyota is able to raised its profit guidance despite no change in the unit sales guidance highlights just how much the automaker is gaining from the currency devaluation. In fact, Toyota has been the biggest beneficiary of Shizo Abe’s policy of yen devaluation, popularly termed as Abenomics, since the automaker has the highest proportion of production at home among the Japanese autos. A greater proportion of production in Japan benefits the automaker’s margins now that the yen has depreciated against the dollar.

See our complete analysis for Toyota Motors here

Unit Sales Concerns

What is slightly concerning is the automaker’s inability to generate the optimal sales growth. Once the effect of a weak currency subsides, Toyota will have a hard time growing its profits in case the demand for its vehicles continues to remains stagnant.

In the U.S., the company has barely managed to maintain the market share this year. It’s best selling Camry sedan is losing sales to the refreshed Accord and Fusion. ^[2] Furthermore, the U.S. automotive market is entering into the phase of consolidation and the growth rate is expected to slow down. Naturally, Toyota’s sales growth will slow down as well unless it manages to perform significantly better than its rivals.

China, the world’s largest automotive market, has been a worry for Toyota for sometime now. Tensions spiked between China and Japan in September last year over claims over the disputed islands, known as Senkaku in Japan and Diaoyu in China. The anti-Japanese sentiment among the general public in China has impacted the sales of Japanese car companies. Sales have normalized lately but the situation is still fragile. ^[3] Other automakers have benefited at the expense of Japanese automakers. For example, Ford has now overtaken Toyota in China in terms of unit sales.

Although the current results beat market expectations, they also highlight the company’s over dependency on a weak yen. Out of the 563 billion increase in the operating income in the second quarter, 540 billion was attributable to currency fluctuations. Toyota’s profits would shrink if the yen were to regain some of the lost ground to the dollar.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Toyota Motors Investor Relations [↩] [↩]
2. U.S. auto sales, wsj.com [↩]
3. Toyota says Oct China auto sales up 80.6 pct y/y, November 1, 2013, reuters.com [↩]