With the Fed solidifying its intent to roll back the stimulus from early next year, the dollar has rallied against the major currencies of the world. The yen even breached the psychological 100 mark.  Since the start of the year, the Japanese currency has already depreciated 20% against the dollar, ever since the new Prime Minister stepped into the office late last year.
Toyota Motors (NYSE:TM) is one of companies that has benefited from the yen devaluation since the overseas profits now translate back to more yen (Toyota Motors Investor Relations)) Further weakening of the yen will only help Toyota’s cause. Other Japanese automotive companies such as Honda Motors (NYSE:HMC) and Nissan will also benefit from a further currency weakening but since Toyota has the highest proportion of production at home, the automaker stands to benefit the most. Exporting the vehicles swell the profit per car since the costs are incurred in yen while the revenues are earned in foreign currencies.
In fact, the automaker has been able to increase its profits despite selling fewer cars. In the first and the second quarter of fiscal 2014, Toyota’s profits were up 94% and 74% respectively even though the unit sales were in the red.  A major reason why the automaker’s results beat the expectations in the first two quarters was because of a conservative exchange rate assumption in the preceding quarters. Toyota had assumed an average rate of 90 yen and 92 yen respectively in the two quarters preceding the results but the yen had consistently stayed above 97. 
Toyota’s latest guidance is based on the assumption of 97 yen to a dollar but if the Fed decides to taper anytime soon, one could very well see the yen staying above the 100 mark. If the exchange rate continues to stay above this value, one can likely expect further profit beats in the coming quarters.
Toyota Insulated From The Housing Market
A withdrawal of the easy monetary policies will also raise the borrowing costs. The 10-year treasury rates have already spiked 24 basis points in the last month. Soaring bond yields will tend to raise the mortgage rates as well, which could negatively impact the housing market. Any slowdown in the housing market could adversely affect the demand for pickup trucks, since they are used extensively in construction activities.
Demand for pickup trucks has been largely robust this year (up 10.6% through October) on the back of a rebounding housing market.  However, American automakers – GM, Ford and Chysler, stand to lose from this since they have traditionally dominated this segment. Toyota remains relatively insulated since it doesn’t have much of a presence in the pickup category.
In addition, there are reports suggesting that Toyota is about to make several changes to its current version of the Camry. The upgraded model will be introduced next year. The Camry sedan is on course to be the best selling car in the U.S. for the 12th consecutive year. 
However, sales of the model have been flat this year with the revamped versions of the Accord and the Fusion becoming increasingly popular among the American public. An upgrade, if successful, could add a significant amount to Toyota’s bottom line especially now that the automaker generates even more profit per car after the yen devaluation.
We have a $123 price estimate for Toyota, which is slightly lower than the current market price. There could be an upside to this stock price in case the Fed soon begins its tapering.
- World stocks rise as worries on Fed taper cool, dollar gains, November 22, 2013, news.yahoo.com [↩]
- Toyota Q1 2014 [↩]
- Toyota Motors Q4 2013 [↩]
- U.S. auto sales, wsj.com [↩]
- Toyota plans Camry tweaks in 2014 to extend U.S. sales race lead, November 24, 2013, detroitnews.com [↩]