Earnings Review: Toyota Revises Its Full Year Fiscal Sales Forecasts On Rising SUV Sales, Weak Yen

Toyota Motors (NYSE:TM) raised its fiscal year profit forecast on the back of a strong third quarter. The impact of surging SUV sales in the U.S. and a weak yen propelled net income from 525 billion yen ($4.60 billion USD) in the previous year to 600 billion yen ($5.26 billion USD). ^[1] Consequently, the Japan-based auto maker increased its full year profit forecast to 2.13 trillion yen ($18.1 billion USD) from the previous forecast of 2 trillion yen ($16.99 billion USD). ^[2] The company is increasing its leadership in terms of profits made from operations even as Volkswagen and General Motors put pressure on its position as the market leader in terms of unit sales. In our note below, we take a closer look at some of the key data points to emerge from the earnings report.

We have a $168 price estimate for Toyota, which is about 25% higher than the current market price.

Revised Sales Forecast

Toyota raised its sales forecast to 27 trillion yen for the full fiscal year from the previous forecast of 26.5 trillion yen. ^[2] The forecast assumes an exchange rate of 109 yen for 1 U.S. dollar. The change in foreign exchange rates contributed about 175 billion to the improvement from the previous projection. ^[2] The Japan based auto maker has been flush with cash for a while but has opted out of using that cash to expand production through the installation of new factories. Instead the company has opted for efficiency gains through cost cutting measures and the expansion of existing operations. The company last opened a plant in 2012.

Volkswagen Could Overtake Toyota As Global Leader In Terms Of Units Sales

German competitor Volkswagen has narrowed the gap between itself and Toyota to only 90,000 units in 2014. One reason behind this has been Volkswagen’s excellent performance in the world’s largest auto market, China. Toyota has missed out on the booms in the SUV and crossover segments in China. The Japanese company has also been reluctant in expanding its capacity in the region. It hasn’t built a single plant in China since 2012 and decided to avoid using its cash reserves for that purpose in 2014, instead opting to buy back shares. The company is unlikely to add to its capacity in China for a year at least. In contrast, competitor Volkswagen is opening a new factory this year in Changsha. ^[3] The factory is expected to add capacity of 300,000 vehicles to the company’s operations in China.((Toyota may lose global sales lead to VW without new China strategy, Automotive News, January 2014)) Volkswagen expects to raise its vehicle capacity in China to more than 4 million by 2018. ^[3]  U.S. based auto maker General Motors, the holder of the second position for unit sales in China and third worldwide, is planning to add five new factories in China in the same time period.

Going forward, Toyota is looking to bolster its presence in the hybrid segment in the Chinese auto market. 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.

Toyota Faring Much Better In the U.S. Market

The U.S. auto market is set to expand for a sixth consecutive year to about 16.9 million units in 2015. Toyota has been able to largely maintain its strong performance in the U.S. auto market through the October-December period. The Japanese auto maker retained its position as the leading retail brand in the automotive market for the fifteenth straight month in December, on the back of strong SUV and crossover demand. Its new models have continued to show strong positive sales trends. Sales for the Toyota brand grew by 12.2% in the month of December, and the company’s premium brand Lexus reported all-time record single month gains of 14.7%. ^[4] This performance is good for the company’s margins, as a higher percentage of luxury cars in the overall sales mix leads to higher cash profits. Moreover, the RAV4 and Highlander SUVs have also set sales records for the month of December. ^[5]

See our complete analysis for Toyota Motors here

1. Toyota Financial Summary Q3, Toyota Pressroom [↩]
2. Toyota Earnings Release Presentation, Toyota Pressroom [↩] [↩] [↩]
3. Toyota may lose global sales lead to VW without new China strategy, Automotive News, January 2014 [↩] [↩]
4. December 2014 Sales Chart, Toyota Press Room, January 2015 [↩]
5. Toyota Motor Sales Results Up 12.7 Percent in December; 6.2 Percent for 2014, Toyota Pressroom, January 2015 [↩]