Toyota Earnings Preview: What We’re Watching Tuesday

As Toyota (NYSE:TM) plans to release results Tuesday and analysts will pay special attention to the company’s costs as well as sales outlook in its two largest markets – the U.S. and China. Both of these markets are facing pressure from negative economic headwinds. While the U.S. is battling an economic slowdown and persistently high unemployment rates, China is battling inflationary pressures which threaten to slow its economy. Toyota competes globally with other major automakers such as Honda (NYSE:HMC), GM (NYSE:GM), Ford (NYSE:F), Daimler AG (NYSE:DAI), Hyundai (SEO:005380) and Nissan (PINK:NSANY).

Our price estimate of $76 for Toyota’s stock is nearly 15% above the current market price.

See our complete analysis for Toyota stock here.

Japan auto-market to remain a concern in medium-term

Japan contributes about 8.5% to Toyota’s stock, as per our estimates. The Japanese auto market has already been declining steadily over many years due to its aging and shrinking population, rapid urbanization, leading to space constraints in many Japanese cities and high tax burden on car owners. Even though Japan auto market was able to reverse its down trend in October 2011 this was largely due to low level of sales last October when auto sales tanked on the first full month after government subsidies to replace cars older than 13 years expired. ^[1] But we believe that this reversal of fortunes will be short-lived because Toyota’s production levels can drop again as Thailand floods will affect their facilities in the country and disrupt their auto-parts supply chain again.

We believe that the continuing deterioration of the economic environment in the U.S. and Europe and the resulting historically strong Yen will further prolong the recovery of the Japanese market and will continue to hurt Toyota in the near-medium term.

Japan Automobile Manufacturers Association (JAMA) has already requested the Japanese government to address the historically high Yen levels and to take measures needed to improve the environment for automobile use in Japan, including auto-related tax reform, so as to provide fresh stimulus to the domestic vehicle market. ^[2]

New vehicle launches to raise costs in the medium-term

To remain competitive, we expect that Toyota will launch several new products in the medium-term to challenge competing products from other global auto-manufacturers.

Moreover the company plans to launch seven all-new hybrid vehicles by the end of 2012 and is collaborating with Tesla to develop RAV4 EV. The company also plans to launch its first commercialized hydrogen fuel cell vehicle by 2015. New product promotions is expected to exert upward pressure on Toyota’s marketing costs through increasing SG&A costs and Research and development costs as a percentage of revenues in the medium-term.

Toyota also partnered with Ford late last month to jointly develop technology for an expanded fleet of hybrid trucks. ((Ford, Toyota to Collaborate on Developing New Hybrid System for Light Trucks, SUVs)) This collaboration will help the company control its R&D expenditures without compromising on technology development.

In addition such collaboration will poise Toyota to defend and increase its market share in the long-term as fuel-efficiency standards become more stringent globally. U.S. fuel-efficiency standards will soon become more stringent with the eventual aim to achieve fuel economy of 54.5 miles per gallon for cars and light-duty trucks by model year 2025. ^[3] In the near-term, fuel efficiency requirements will be raised to 35.5 mpg for model years 2012-2016 vehicles.

While recovering production supports margins, rising Yen erodes it

In September, the company had announced that its U.S. operation will return to 100% capacity since Japan earthquake in March disrupted its supply chain and inventory levels. ^[4] As Toyota’s production globally returns to full production capacity their fixed cost per unit of vehicle will reduce and support margins.

But rising Yen will continue to erode Toyota’s profits from sales of vehicles produced in Japan but sold overseas.

You can drag the trend lines in the modifiable charts above to see the impact of these trends on Toyota’s stock value.

Understand How a Company’s Products Impact its Stock Price at Trefis.

1. Reuters: Japanese car sales reverse trend [↩]
2. JAMA Requests to Japan’s New Prime Minister [↩]
3. President Obama announces historic 54.5 MPG fuel efficiency standard [↩]
4. Toyota: U.S. August 2011 Sales Chart [↩]