Toyota Earnings Review: Strong U.S. Sales Hide Emerging Markets Weakness

Strong sales in the U.S. helped Toyota Motor Corp (NYSE:TM) overcome weakness in emerging markets like Thailand, India and Brazil, and post a net income gain of 4.6% in the first quarter of fiscal 2015. ^[1] Consolidated net vehicle sales increased by 9,000 units driven by a 3% increase in North America sales where refreshed SUV models, pickup trucks and Camry sedans sold extremely well during the quarter. Sales in Europe increased by 7% on the back of increasing sales of Toyota’s compact hatchback Auris and subcompact Yaris, while sales in Japan dropped as expected following the hike in sales tax and drop in real wages as a result of Prime Minister Shinzo Abe’s inflationary policies. Net revenue for the quarter increased by 2.2% compared to the first quarter in fiscal 2014. The operating margin for the quarter increased by 20 basis points as a result of cost reduction efforts, higher sales in some geographies and a favorable sales mix. ^[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.

Cautious On Emerging Markets

Consistent with the previous quarter, the automaker continued to be 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 were down by 9,000 units year-on-year, affected by weaker sales in Thailand and India, where demand shrank and competition increased. ^[2] Unit sales from emerging markets, including China, account for about 45% of the automaker’s sales. ^[3]

In China, Toyota’s nine month consecutive spell of growth in sales was reversed in June as the automaker posted a 7.6% year-on-year decline. The Japanese auto maker attributed the decline to changes in its model line-up, especially its Corolla sedan. Planning for the launch of a redesigned Corolla in mid-June, the company had stopped taking orders for the older model in May. ((Nissan, Honda China Car Sales Accelerate, Wall Street Journal, July 2014)) Toyota, like fellow Japanese car makers Nissan and Honda, has been attempting to recover from the setback it received following a territorial dispute between China and Japan, which centered on uninhabited islands in the East China Sea. The dispute led to public protests in China in 2012 which led to some people attacking drivers of cars with Japanese auto makes. Sales of Japanese cars fell in the aftermath of these events.

Dependency On North America Increasing

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 accounted for a very small fraction of the automaker’s North American deliveries, sales gains made by the vehicle did not offset the weakness in the car segment.

However, in fiscal 2015, Toyota is outpacing the growing U.S. auto market and seems to be on its way to its best year since 2006 in the country. As a result of improving consumer confidence, improving employment and low interest rates, the company’s U.S. deliveries climbed 11%  in the April-June quarter, outpacing the total industry’s 6.9% rise. ^[4] The momentum is expected to continue in the next quarter as Toyota’s total U.S. sales for the month of July rose by 12%, allowing the company to surpass Ford Motor to become the #2 seller in the country for the month. ^[4] Consequently, the company has raised its sales forecast in the region from 2.62 million unit sales to 2.71 million unit sales. ^[2] Moreover, Toyota posted a 170 basis point rise (Y-O-Y) in operating margin for the quarter in which operating income increased by nearly half a billion US dollars.((FY2015 Q1 Results Investor Presentation, Toyota Motors Investor Relations))  The company is beginning to sell a lot high-end SUVs in the country and its RAV4 compact utility just posted its best month ever in the U.S. in July. As a result, it is posting much higher margins than previously when it was only selling Corollas and Camrys in the country.

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 of fiscal 2014, 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. For the first quarter of fiscal 2015, we expected auto sales in Japan to fall as a result of the 3% hike in consumption tax introduced in April this year. As a result of Prime Minister Shinzo Abe’s policies, real incomes in Japan have been falling and this has had an impact on the sales of car makers like Toyota, whose sales fell by 20,000 units in the quarter. ^[2] However, Honda posted an astonishing sales growth of 44% for the quarter. This surge in sales was partly due to the introduction of fully remodeled versions of the Fit and Odyssey as well as new car introductions like the N-WGN minicar and Vezel subcompact, but a significant portion of this increase was due to a backlog of orders registered before the sales tax hike came into effect in April. Regardless, the outlook for Toyota’s sales in Japan is not too optimistic. Japan is in the midst of economic restructuring as a number of legal, administrative and policy reforms are introduced in order to improve the productivity of the underlying economy. These effects will take some time to come into effect and until then we do not expect the downtrend in auto sales to reverse.

See our complete analysis for Toyota Motors here

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1. Toyota Motors Investor Relations [↩]
2. FY2015 Q1 Results Investor Presentation, Toyota Motors Investor Relations [↩] [↩] [↩] [↩]
3. Toyota Motors 2014 Results Earnings Call Transcript, Seeking Alpha, May 2o14 [↩]
4. Toyota profit surges on U.S. SUV demand, Automotive News, August 2014 [↩] [↩]