Toyota Posts Record Profits; Guidance Revised Upwards

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TM: Toyota Motor logo
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Toyota Motor

Helped by a weak yen, Toyota Motor Corp‘s (NYSE:TM) profits grew fivefold to 525.5 billion yen ($5.1 billion) in the third quarter, while revenues surged 24% to 6.59 trillion yen ($6.5 billion). [1] The disparity between revenue growth and income growth highlights just how much the automaker is gaining from Prime Minister Shinzo Abe’s policy of yen devaluation. Toyota has benefited hugely from a deteriorating yen since the automaker produces almost 40% of its vehicles in Japan. The overseas profits translate back to more yen when repatriated.

For the full year, the automaker now expects a net income of 1.9 trillion yen ($18.5 billion), up from the previous guidance of 1.7 trillion yen ($16.5 billion). Toyota has revised its guidance a number of times this fiscal, primarily due to the continual weakening of the yen. During the previous earnings call, the automaker had assumed an exchange rate of 97 yen a dollar for the entire fiscal year but now expects the figure to rise to 100 yen a dollar. A weaker yen only works in favor of the company.

In the third quarter, Toyota sold 2.57 million vehicles, up 9.5% over the previous year figure. However, the automaker left its unit sales guidance of 10.1 million units unchanged. In 2013, Toyota defended its crown of the largest automaker in the world by selling 9.98 million vehicles.

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We have a $123 price estimate for Toyota, which is about 10% higher than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

Cautious On Emerging Markets

Despite record profits, the automaker was cautious on sales in emerging markets. The gradual withdrawal of the Fed’s quantitative easing, or tapering as it is known, is causing currency fluctuations in developing economies, which is driving uncertainty in these markets. Political turmoil in Thailand, one of Toyota’s key markets, could also drive down sales in 2014. Toyota’s sales in Thailand plummeted 32% during the third quarter. Unit sales from emerging markets, including China, account for about 45% of the automaker’s sales.

In China, Toyota’s sales grew 9.2% to 917,500 vehicles in 2013. [2] Sales were weak during the first half of the year, as the automaker battled anti-Japanese sentiment among the general public triggered by political reasons. However, situation gradually improved and sales accelerated during the second half. In 2014, the automaker expects sales to rise to 1.1 million, as it anticipates the launch of the Yaris and the Vios to boost overall demand.

North America To Remain Weak In The Fourth Quarter

Through the three quarters of the fiscal, Toyota’s North American sales rose 5.2% to 1.97 million units. However, for the fiscal year ending March, Toyota cut its forecast for North American sales by 1.1% to 2.6 million units, due to a weak presence in the pickup segment and harsh weather which is affecting the overall automotive industry. Toyota released the revamped version of the Tundra pickup last year, but since it accounts for a very small fraction of the automaker’s North American deliveries, sales gains made by the vehicle might not offset the weakness in the car segment.

In the car segment, Toyota is aiming to sell 330,000 units of the refreshed Corolla, about 10% more than the 2013 figure. Camry is another model which could see some growth, especially during the second half of 2014. Although Camry was the best selling car in the U.S. last year, others such as the Fusion and the Altima narrowed the gap. Toyota is making several changes to the current version and the upgraded model should be launched this year. North America is one of the biggest markets for Toyota and accounts for more than 25% of the company’s sales.

Japanese Concerns

There are concerns that Honda could eat up Toyota’s market share in Japan, now that the refreshed Fit and the all new Vezel have been launched. During the third quarter, the Fit displaced Toyota’s Aqua as the highest selling vehicle in Japan. The Vezel, a crossover SUV, was launched in the country in December and is another one of Honda’s products for the value seeking customers.

The government of Japan is raising the sales tax on new vehicles beginning from April this year. [3] As a result, customers are rushing to get their vehicles registered before the tax hike, due to which automotive sales are expected to rise strongly in the January-March quarter. However, there could be a sharp decline once the tax hikes come into effect, which could erode the automaker’s earnings in fiscal 2015 (i.e. April’14- March’15).

See our complete analysis for Toyota Motors here

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Notes:
  1. Toyota Motors Investor Relations []
  2. Toyota says December China auto sales up 19.4 percent year on year, January 6, 2014, reuters.com []
  3. Japan business mood up, sales tax hike weighs on outlook -Reuters Tankan, January 22, 2014, reuters.com []