How Does A 7% Decline In The Japanese Auto Market Reflect On Toyota Motors?

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

The Japanese automotive market is shrinking. New vehicle registrations in Japan contracted by 14% in the first quarter of 2015. Car sales declined by 14% for the five month period Jan-May 2015. This figure was lower at 8% for May 2015, but the overall contraction trend persists. [1] Toyota Japan is the largest division of Toyota Motors (NYSE:TM) contributing more than 20% to Toyota’s share price in our estimation.  Although Toyota has been able to capture only 13% of the North American market, it commands a mammoth share of more than 40% in Japan. We estimate that if Toyota’s unit sales continue to decline at 7% annually, which is what we observed in the second quarter of 2015, there can be a significant downside to its valuation.

See our complete analysis for Toyota Motors here

10% downside to Toyota’s valuation if sales continue to decline at 7%

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Toyota sold around 500,000 units in Japan for in Q2 2014.  This number reduced by 7% to 469,000 units for the same quarter this year in 2015.  ((Toyota SEC Filings)). The contraction in Japanese auto market might lead to similar decline for the full year.

Using Trefis interactive technology, we can assess the impact of this decline on Toyota’s stock price.  Our current estimates imply a gradual decline in units sold in Japan from 5.50 million to 5. 23 million, over the five year forecast period, which is roughly  1% decline on an annual basis.  However, in a scenario where the sales decline by 7% every year, our price estimate for the company decreases from $149 to $137 per share.

Toyota1

Thus, a 7% annual decline in units sold in Japan can lead to a 10% downside in our price estimate.  This scenario assumes that the other drivers like vehicle price, market share and gross margins in Japan remain unchanged.

Other regions can compensate for Japan slowdown 

We expect the demand for Toyota vehicles to increase in North America, though not at a very fast rate.  Although Toyota faces tough competition in the U.S.  we expect it to maintain its market share in the region.  In light of the recent Volkswagen issue, there might be a possibility of Toyota gaining market share in the U.S. which could fuel sales growth.  In this scenario, the Japan slowdown can be partially offset by increased sales in the U.S., thus mitigating the potential downside.

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Notes:
  1. Car sales statistics []