Toyota Motors Earnings Review: Strong Sales In Japan, Weak Yen Propel Toyota To Profitability But Outlook Cautious

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Toyota Motor

Helped by a weak yen, Toyota Motor Corp‘s (NYSE:TM) profits nearly doubled to 1.82 trillion yen ($17.9 billion) in fiscal 2014, while sales surged 16% to 25.69 trillion yen ($252 billion). [1] The disparity between revenue growth and income growth highlights just how much the automaker gained from the devaluation of the yen and increased sales in key markets such as North America and China. Toyota has benefited hugely from a deteriorating yen since the automaker produces almost 50% of its vehicles in Japan. The overseas profits translate back to more yen when repatriated. The automaker also recorded a robust growth in operating profits from 1.32 trillion yen($13 billion) in fiscal 2013 to 2.29 trillion yen ($22.5 billion) in fiscal 2014. The company attributed this increase to successful efforts at cost reduction and efficient marketing strategies.((Toyota Motors 2014 Results Earnings Call Transcript, Seeking Alpha, May 2o14))

Consolidated vehicle sales for the fiscal year grew from 8.87 million to 9.1 million, implying a growth of nearly 3%. The automaker left its unit sales guidance of 10.1 million units for the calendar year 2014 unchanged. For fiscal 2015, the car maker gave a cautious outlook, projecting a slowdown in the number of cars sold. Toyota’s sales for the fourth quarter were helped significantly by last minute demand spurred by the expected consumption tax hike in Japan, which came into effect on April 1. Following the hike, car sales are expected to decline. The company has guided for a 6.5% reduction in the number of units sold in Japan for fiscal 2015. If we take into consideration the fact that a second hike in consumption tax, from 8% to 10%, is likely to come into effect in October 2015, it is likely that vehicle sales in Japan are likely to lag for a while. [2]

We have a $128 price estimate for Toyota, which is about 20% higher than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

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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 units sold in Asia plummeted by 75,000 units year-on-year, affected by weaker sales in Thailand and India, where demand shrank and competition increased despite increased sales in Indonesia. Unit sales from emerging markets, including China, account for about 45% of the automaker’s sales.((Toyota Motors 2014 Results Earnings Call Transcript, Seeking Alpha, May 2o14))

In China, Toyota’s sales grew 9.2% to 917,500 vehicles in 2013. [3] 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 Improving

Through the three quarters of the fiscal year, Toyota’s North American sales rose 5.2% to 1.97 million units. However, for the fiscal year 2014, Toyota’s North American sales increased only to 2.53 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 raised the sales tax on new vehicles beginning in April this year. [4] As a result, customers rushed to get their vehicles registered before the tax hike, due to which automotive sales rose 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 Motors FY2014 Financial Results [PDF] []
  3. Toyota says December China auto sales up 19.4 percent year on year, January 6, 2014, reuters.com []
  4. Japan business mood up, sales tax hike weighs on outlook -Reuters Tankan, January 22, 2014, reuters.com []