Earnings Review: Gains in North America, China Help Toyota Offset Slowing Sales Momentum Elsewhere

-12.26%
Downside
239
Market
209
Trefis
TM: Toyota Motor logo
TM
Toyota Motor

Strong sales in the U.S. helped Toyota Motor Corp (NYSE:TM) overcome weakness in emerging markets, Europe and Japan, as well as post a net income gain of 12.6% in the first half of fiscal 2015. [1] Consolidated net vehicle sales stayed flat despite losses in all regions except North America where refreshed SUV models and pickup trucks sold extremely well during the half. Sales in North America  increased by 12.4% on the back of increasing sales of Toyota’s SUVs RAV4 and Highlander, 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 3.3% compared to the first half of fiscal 2014. The operating margin for the quarter increased by 40 basis points as a result of cost reduction efforts and favorable currency translations. [2]

We have a $128 price estimate for Toyota, which is about 8% higher than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

Emerging Market Slowdown

Relevant Articles
  1. With EV Plans Taking Shape, What’s Next For Toyota Stock?
  2. Toyota Stock Looks Like A Buy Despite Tepid Guidance
  3. Why Toyota Stock Looks Like A Buy Despite Mixed Earnings
  4. With Delivery Issues Likely To Ease, Should You Buy Toyota Stock?
  5. Company Of The Day: Toyota
  6. Forecast Of The Day: Average Revenue Per Toyota Vehicle

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, has also drive down sales in 2014. Toyota’s units sold in Asia were down by 16,000 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 sales growth ended 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.

Sales fell in July by 1.1% on a year-on-year basis, but the company returned to growth in the month of August, posting a 8.9% year-on-year rise. [4] Toyota, which aims to sell 1.1 million vehicles this year in China, experienced a massive boost in September as sales grew by 26% from a year earlier. In the first nine months of the year, the company sold over 710,000 vehicles, an 11.5% increase compared to the previous year. Since, the company sold 917,500 vehicles in China in 2013, maintaining the same growth rate will see it fall short of its stated target for the year by about 78,000 units. However, the company has stated that it remains on target to achieve its 2014 targets. This may seem possible given the 27.1% growth in sales in October. [5]

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 affected 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 North America deliveries climbed 12.4%  in the April-September period, outpacing the total industry’s ~7% rise. ((FY2015 Q2 Results Investor Presentation, Toyota Motors Investor Relations)) The momentum is expected to continue in the next quarter as Toyota’s total U.S. sales for the month of October rose by 3%, with Toyota brand sales increasing by 7.5% and Lexus sales increasing by about 3%. Toyota’s sales momentum in the U.S. is being driven by robust growth momentum displayed by the RAV4 and Highlander SUVs. The introductions of the 2015 models of Camry and Corolla should help boost sales further. The growth momentum in the U.S. coupled with the increasing presence of SUVs in the sales mix and the increasing exchange rate between the Yen and the U.S. dollar bodes well for the company’s margin. [2] Consequently, the company has raised its sales forecast in

See our complete analysis for Toyota Motors here

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. Toyota Motors Investor Relations []
  2. FY2015 Q2 Results Investor Presentation, Toyota Motors Investor Relations [] [] []
  3. Toyota Motors 2014 Results Earnings Call Transcript, Seeking Alpha, May 2o14 []
  4. Toyota says September China auto sales up 26.1 pct y/y, Reuters, October 2014 []
  5. Toyota sees strong rise in China car sales, BBC, November 2014 []