Earnings Preview: Strong U.S. Performance Should Drive Profitability For Toyota

Toyota Motors (NYSE:TM) is set to report financial results for the second quarter of fiscal 2016 on Thursday, November 5th. ^[1] The auto industry is facing a challenging macro environment with sales declining in China, emerging markets and South America. Sales in Europe have been weak for a number of years. As a result, these companies are relying completely on North America to drive both sales gains and profits. Below, we take a look at how we expect Toyota to fare this quarter.

See our complete analysis for Toyota Motors here

Strong Third Quarter In U.S.

Traditionally, Toyota’s sales in U.S. have been driven by sales of passenger cars. The company’s sedans Camry and Corolla are extremely popular among consumers and have formed the core of the Toyota brand in the region. However, year-over-year sales gains for sedans have been hard to come by in 2015 as gas prices have remained low and consumers have preferred SUVs, crossovers and pick-ups over sedans. Considering these factors, the growth displayed by Toyota’s sedans in September are surprising. The 12.4% sales gain for Prius was surprising because year-to-date Prius sales had been down 17% through the first eight months of the year. ^[2]  Toyota is set to release a new version of the hybrid vehicle, which will be modeled after its fuel-cell vehicle Mirai and manufactured on its new Global vehicle architecture. The gain was most likely driven by an increase in incentives as Toyota looked to clear out its inventory of the old Prius model. However, no such claim can be made for the Camry, whose 2016 version is going to be hardly any different from the 2015 version. Still the sales of Camry grew by 21% in September. ^[3] Corolla sales grew by 29.7%. ^[3]

Toyota is also faring well in the trucks and luxury segments. The company’s SUV division sales grew by 15.3% in September driven by a 34.6% gain for Sequioa, 32.6% gain for 4Runner and a 19.3% gain for RAV4. ^[3] Overall truck sales grew by 10.3% for the month and 9.3% on a year-to-date basis. ^[3] On the luxury front, the introduction of the Lexus NX has boosted overall sales for the brand. On a year-to-date basis, Lexus truck sales have grown by a strong 28.4% driven chiefly by the sales of NX, as sales of all other models have declined on a year-over-year basis. ^[4]  Moreover, the company, which had been wary of boosting its production capacity in China following the anti-Japan protests in 2012, had announced plans to spend $440 million on the expansion of a new plant in Guangzhou. ^[5]

However, the Chinese economy has since been in contraction. GDP growth rate has slowed down, foreign capital has flowed out of the country, the stock market crashed and consumer spending has been affected. Moreover, dealerships, which had already been struggling with profitability isssues, had to be subsidized by companies to sell their cars on discounts. The Chinese Government has come out with a stimulus plan for the auto industry, that lowers the consumer purchase tax on vehicles from 10% to 5% with engines 1.6 liters or less. ^[6] We will look out for information on how this plan will affect China sales for the company going forward.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Toyota IR Calendar [↩]
2. September 2015 Sales Conference Notes, Toyota Corporate Newsroom, October 2015 [↩]
3. Ref: 1 [↩] [↩] [↩] [↩]
4. Ref: 1) Strong SUV and Lexus sales will most likely lead to higher reported profits for the company.

   Last Quarter’s China Performance Won’t Be Repeated
   

   Toyota is far behind Volkswagen and General Motors in China in terms of unit sales. At the end of the last quarter, however, Toyota has been doing surprisingly well in China with a 10% year-over-year  growth on the back of increased demand for the new Corolla and Levin compact vehicles. ((Japanese cement comeback in China as Toyota posts record sales, Automotive News, July 2015 [↩]

5. Toyota plans for capacity increase in China, Seeking Alpha, April 2015 [↩]
6. Chinese Automakers Surge After Government Cuts Purchase Tax, Bloomberg, September 2015 [↩]