Earnings Preview: Strong U.S. Sales, Weak Yen Should Boost Toyota’s Bottomline

Toyota Motors (NYSE:TM) is set to report financial results for the third quarter of fiscal 2016 on Thursday, February  5th. ^[1] The Japanese auto maker had a strong 2015, retaining its position as the global leader of the auto industry by unit sales. The company has been facing many challenges in the different geographies it operates in, but its strong performance in the U.S. and the declining yen have resulted in solid profitability over the period. In the previous quarter, the impact of currency fluctuation was such that the gains made in currency translation cancelled out a net loss in dollar terms and resulted in a net income gain of $1.4 billion. For the October-December quarter, we expect the company will report increased profits on the back of strong sales momentum in the U.S. over the three months and the impact of the low exchange rate for the yen.

See our complete analysis for Toyota Motors here

Strong Third Quarter In U.S.

Toyota didn’t have a strong first half of fiscal 2016 in North America. It sold around 984,000 units in North America in the first half of the fiscal year 2016, a decrease of 46,000 units compared to the first half of the last fiscal year. ^[2] The Japanese auto maker’s operating income fell from $1.34 billion in the fiscal second quarter last year to $1.13 billion in the second quarter while operating margin fell by 120 basis points to 5.0% as a lot of sales were made at lower transaction prices. ^[3]

Toyota’s strength lies in passenger cars. Its Camry, Corolla and Prius have been strong sellers in the U.S. in the past, but in the last couple of years sales of SUVs, crossovers and pick-up trucks have taken off at the expense of sedans. Low gas prices have fed into the same trend. In the final three months of the year, the company’s sales grew at a rate of close to 9%. The main contributors to this growth were the Toyota Camry, Prius sedan, RAV4, Sequioa and Highlander, all of which experienced strong growth towards the end of the year. Additionally, Lexus had a strong year in 2015, registering a market share of close to 19% in the U.S. luxury car market for the full year. Strong momentum along with the effect of higher U.S. dollar prices in comparison to the Japanese yen should mean that the company’s profits rise in the third quarter.

China Outlook Cautious

Toyota had a decent 2015 in China, narrowly beating its targeted 1.1 million sales for the full year. ^[4] The company sold 1.12 million units in 2015, implying a growth rate of around 8%. ^[5] In 2016, the company is targeting 1.15 million new vehicle sales at a growth rate of 2.7%. ^[5] Toyota ranks far behind Volkswagen and General Motors in the Chinese market and has had a tough time cracking the code for the region. Slowing growth coupled with the devaluation of the yen will put downward pressure on the company’s profitability in the region. Additionally, Toyota’s average transaction prices are also likely to be lower because the impact of the reduction in the vehicle purchase tax on certain vehicles in the country.

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1. Toyota IR Calendar [↩]
2. FY 2016 Second Quarter Financial Results, Toyota Investor Relations [↩]
3. Ref: 2 [↩]
4. Toyota targets 1.15 million vehicle sales in China for 2016, Reuters, January 2016 [↩]
5. Ref: 3 [↩] [↩]