Earnings Preview: Strong U.S. Momentum Should Raise Toyota’s Profits

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TM: Toyota Motor logo
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Toyota Motor

Toyota Motors (NYSE:TM) is scheduled to announce its fourth quarter and full fiscal year 2015 earnings on May 7. All things considered, it was generally a good year for Toyota. The company had top sellers in many car categories in the U.S. car market, including Camry (best selling car), Corolla (best selling compact car), Avalon (best selling car in the premium segment), and several other cars achieving their one-year sales records, including RAV4 and Highlander.  After increasing its market share in the U.S., its biggest market, by 20 basis points to reach 14.2%, the Japan-based auto maker increased its sales in the first three months of 2015 by 10.2% on a year-to-date basis. [1] On the back of strong performance by both Toyota and Lexus in North America, plus strong momentum in China, we expect the company to report strong figures when it announces results on Thursday.

Below, we take a closer look at the figures we will be watching out for in this quarter’s results. We have a $168 price estimate for Toyota, which is about 20% higher than the current market price.

Higher SUV and Lexus Sales Can Boost North America Margins

In the U.S., Toyota has been able to largely maintain its strong performance through the January-March period. The Japanese auto maker has been the leading retail brand in the automotive market for close to 18 months now 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 4.4% in the month of March and the company’s premium brand Lexus reported single month gains of 8.8%. [2] 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.

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Cautious on Emerging Markets

Consistent with the previous quarter, we are cautious on Toyota’s 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, put downward pressure on sales in 2014. In the first half of fiscal 2015, Toyota’s units sold in Asia were down year-on-year, affected by weaker sales in Thailand and India, where demand shrank and competition increased. [3] Unit sales from emerging markets, including China, account for about 45% of the automaker’s sales.

China Provides Some Reasons For Optimism

In the calendar year 2014, Toyota narrowly kept its position as the global leader in terms of vehicle unit sales, ahead of German auto maker Volkswagen AG. [4] Toyota sales, including deliveries from its mini-car subsidiary Daihatsu,  and truck making affiliate Hino, rose by 3% in 2014 to reach 10.23 million units, while Volkswagen increased its sales by 4% to reach 10.15 million units sold in 2014. Toyota managed to achieve this target even though it missed out on its China sales target of 1.1 million units. The Japanese auto maker sold 1.03 million units in the calendar year 2014, an increase of 13% compared to 2013.

The major factor in the narrowing of that gap is that Toyota only sells a third of the units sold by Volkswagen in China, the world’s biggest car market. This is because 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. However, that is changing now. The company recently announced that it will spend $440 million on expansion of a plant in Guangzhou owned through its joint venture. [5]

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.

See our complete analysis for Toyota Motors here

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Notes:
  1. Toyota March U.S. Sales, Seeking Alpha, April 2015 []
  2. Toyota takes U.S. market share led by old hand, Seeking Alpha, April 2015 []
  3. FY2015 Q1 Results Investor Presentation, Toyota Motors Investor Relations []
  4. Toyota keeps top spot despite strong VW challenge, Automotive News, January 2015 []
  5. Toyota plans for capacity increase in China, Seeking Alpha, April 2015 []