Toyota Earnings Preview: Profits To Swell, Though Driven By Weak Yen

Toyota Motors (NYSE:TM) is scheduled to announce its earnings on February 4. The world’s largest automaker has seen its profits surge in the last two quarters, helped by a deteriorating yen. During the previous earnings release, Toyota upped its guidance and expects to generate net income of 1,670 billion ($16.5 billion) on revenue of 25,000 billion yen ($247 billion). In fiscal 2014, Toyota expects to sell 10.1 million units globally.

Recent results have shown that profits of Japanese companies have been more dependent on currency fluctuations than on the number of units sold. Toyota could once again beat its own forecasts since there was further deterioration in the yen in the fourth quarter. Toyota’s previous guidance was based on the assumption of an exchange rate of 97 yen to a dollar, but the yen consistently traded above 100 in the corresponding period. As a result, profits could once again grow at a faster than expected rate. Toyota has been the biggest beneficiary of Shizo Abe’s policy of yen devaluation, since the automaker has the highest proportion of production at home among the Japanese autos. The overseas profits swell when translated back to yen.

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

North American Sales Stable But Margins Could Improve

In the U.S., Toyota has been able to largely maintain market share in 2013 as sales rose 7.4%. The automaker introduced the refreshed Corolla last year, due to which sales of the model were particularly strong in the latter half of the year. The automaker sold ~302,000 units of the model during 2013, compared to its target of 300,000 units. ^[1] Toyota is aiming sell 330,000 units next year now that the refreshed model will be on sale for the entire year.

Toyota also introduced the revamped version of its Tundra pickup in the second half of 2013. A model upgrade was due, as the vehicle hadn’t been refreshed in seven years. ^[2] Although toppling either the F-Series or the Silverado looks highly unlikely, the Tundra does offer a good alternative. The Tundra is a concerted effort by Toyota to gain share in the pickup segment, which is otherwise dominated by American automakers. Toyota has generally been disciplined in its pricing, since the automaker does not want to compromise on margins. Accordingly, its North American margins are likely to witness a significant improvement in the upcoming results.

Losing Market Share In Japan

Although Toyota’s sales in Japan jumped 11% in the quarter ending December, the automaker still lost market share. ^[3] This is mainly because Honda is posting record sales, ever since it launched the refreshed version of the Fit. The remodeled Fit even overtook Toyota’s Aqua as the highest selling vehicle in Japan.

The Japanese government has decided to raise the sales tax on new vehicles from April onward. As a result, customers are rushing to register their vehicles before the tax hike comes into effect, and auto sales are likely to remain strong in the near term. However, if Toyota loses market share once sales normalize, things could begin to get worrisome for the automaker. Japan accounts for about a fourth of Toyota’s sales, so losing market share on its home turf could threaten its long-term profitability.

Chinese Sales Improve

After tensions broke out between China and Japan in September 2012, Japanese brands have fallen out of favor with the Chinese public. The anti-Japanese sentiment gradually improved and by the end of 2013, sales had normalized. For example, Toyota’s unit sales were up 80.6%, 40.7% and 19.4% in October, November and December respectively. Note that sales were unusually low in 2012, so these growth rates come on top of a low base. For the full year, Toyota sold 917,500 vehicles in China, up 9.2% over the 2012 figure. ^[4]

Going forward, Toyota is looking to bolster its presence in the hybrid segment. The Chinese government wants the unit sales of electric vehicles and hybrids to touch at least 5 million units annually by 2020 and is providing incentives to automakers who are developing such vehicles. More than 22 million vehicles were sold in China last year, and the government is trying to encourage hybrid sales to combat pollution issues. Toyota has signaled its intent to grow in this segment by partnering with two local automakers in order to develop new hybrids.

See our complete analysis for Toyota Motors here

See More at Trefis | View Interactive S&P Capital IQ Analyses (Powered by Trefis)

1. U.S. auto sales, wsj.com [↩]
2. Full-size pickup makes a statement with new look, September 24, 2013, driving.ca [↩]
3. Japanese auto sales, jama.com [↩]
4. Toyota says December China auto sales up 19.4 percent year on year, January 6, 2014, reuters.com [↩]