Toyota Earnings Preview: A Weak Yen To Improve Profitability

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Toyota Motors (NYSE:TM) is scheduled to announce its fourth quarter and full-year earnings on May 8. The world’s largest automaker has seen its profits surge in the last three quarters, helped by a deteriorating yen. In the third quarter, Toyota’s  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] During the previous earnings release, Toyota upped its guidance and expects to generate net income of 1,900 billion ($18.77 billion) on revenue of 25,500 billion yen ($252 billion). In fiscal 2014, Toyota expects to sell 10.1 million units globally. [2]

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 100 yen to a dollar, but the yen consistently traded above 100 in the corresponding period. In addition to changes in assumption of exchange rates, Toyota has also made cost reductions and engaged in marketing activities. As a result, profits could once again grow at a faster than expected rate. Toyota has been the biggest beneficiary of Shinzo 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. [3]

We have a $129 price estimate for Toyota, which is about 20% higher than the current market price.

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Car Recalls To Prevent Margins From Expanding

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. [4] Toyota is aiming to 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. [5] 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.

In March, the automaker agreed to pay a record $1.2 billion fine in the United States for misleading buyers about safety defects during the 2009-2010 car recall due to unintended acceleration. Unconnected to that incident, Toyota recalled 6.4 million vehicles in April due to a range of defects in one of the biggest car recalls ever. Expenses related to these incidents are likely to affect the gains made from increased pickup sales. Accordingly, its North American margins are unlikely to witness a significant improvement in the upcoming results. [6]

Losing Market Share In Japan

Although Toyota’s sales in Japan jumped 11% in the quarter ending December, the automaker still lost market share. [7] 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.

Nonetheless, the company enjoyed one of its best quarters from January-March. Spurred on by the impending hike in the consumption tax, Japanese buyers rushed to purchase cars at the last opportunity to buy them cheaply. Prior to the April 1 tax increase, deliveries rose to more than 783,000 vehicles in March, the highest monthly figure in eight years. This temporary hike in sales has eased some of Toyota’s worries related to the declining market share. 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. [8]

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. [9]

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. Additionally, Toyota’s Prius is the highest selling gasoline electric vehicle in the world, with unit sales of 315,500 in 2013. However, only 1,400 of those were sold in China. There is clear upside potential for Toyota in this segment. The low subsidies offered by the Chinese Government to gasoline backed EV’s ($3000 vs $9000 for hybrids and fully electric vehicles) and the high import costs associated with vehicle parts push up the price of the Prius. In fact, a Prius in China costs almost as much as an entry-level Audi. Unless, Toyota decides to considerably lower the price of the Prius and accept lower profits, sales are unlikely to go up.

See our complete analysis for Toyota Motors here

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Photographer: Tomohiro Ohsumi/Bloomberg

A visitor looks at Toyota Motor Corp. vehicles at the company’s showroom in Tokyo…. Read More

Related

Call it Japan’s Great Hangover.

Vehicle deliveries last month in Asia’s second-largest auto market fell to the lowest since December 2012 after Japan raised its consumption tax for the first time 17 years, according to industry figures released yesterday. In the run-up to the levy being increased 3 percentage points to 8 percent on April 1, sales had surged for seven straight months.

More broadly, the figures may foreshadow the extent of the consumer backlash resulting from the higher taxes Prime Minister Shinzo Abe imposed to counter the world’s biggest debt burden. Economists estimate that this quarter, Japan will see its biggest economic contraction since the earthquake and tsunami that ravaged the country three years ago.

“Any sane person was buying big-ticket items in February or March rather than in April,” Martin Schulz, an economist at Fujitsu Research Institute in Tokyo, said by telephone. “The Japanese carmakers will have to prove how much they really can work this very difficult market.”

Total sales fell 5.5 percent to 345,226, according to the Japan Automobile Dealers Association and Japan Mini Vehicle Association. The slump may deepen this month as poor weather prevented some customers, who placed orders before the sales tax increase, from getting their cars delivered until April.

Yearlong Slump

The delay made industry sales for April artificially high, and the numbers could turn “very grave” starting this month, Yoshitaka Hayashi, a director at the dealer association, told reporters yesterday.

Carmakers are bracing for a yearlong slump, with the Japan Automobile Manufacturers Association’s forecasting a record 16 percent sales decline for the fiscal year ending in March 2015.

Toyota Motor Corp. (7203) and Mazda Motor Corp. delivered their fewest number of vehicles since 2011, according to the industry figures. Fuji Heavy Industries Ltd., maker of Subaru cars, saw sales tumble 41 percent to a record low, based on data stretching back to 1993.

Nissan Motor Co. (7201), Honda Motor Co., Suzuki Motor Corp. and Mitsubishi Motors Corp. bucked the slump by posting gains. Sales rose 7.1 percent for Nissan, 12 percent for Honda, 11 percent for Suzuki and 27 percent for Mitsubishi.

Shares of Japanese automakers, except for Honda and Daihatsu Motor Co. (7262), fell today in Tokyo trading as the benchmark Topix Index slipped 0.1 percent.

March Binge

Prior to the April 1 tax increase, consumers went on a binge as they helped push deliveries to more than 783,000 vehicles in March, the highest monthly tally in eight years.

Notes:
  1. Toyota Motors Investor Relations []
  2. Toyota Motor’s CEO Discusses Q3 2013 Results, Seeking Alpha, February 2014 []
  3. US Dollar To Japanese Yen Exchange Rate, Bloomberg []
  4. U.S. auto sales, wsj.com []
  5. Full-size pickup makes a statement with new look, September 24, 2013, driving.ca []
  6. Toyota Recalls 6.5 Million Cars Over Steering And Seat Problems, Guardian, April 2014 []
  7. Japanese auto sales, jama.com []
  8. Japan’s Consumption Hangover Begins As Car Sales Decline, Bloomberg, May 2014 []
  9. Toyota says December China auto sales up 19.4 percent year on year, January 6, 2014, reuters.com []