Toyota Earnings Preview: Impact Of Declining Car Market In The U.S. Likely To Dampen Bottom Line

Toyota Motors (NYSE:TM) is set to report earnings for the fourth quarter of fiscal year 2017 on Wednesday, May 10. The Japanese auto maker posted an 11.2% decline in earnings per share in dollar terms as its operating income dropped by 32.6% to $4 billion compared to the third quarter in the previous fiscal year. (Fiscal years end with March.)  Geographically, the company’s operating income dropped in all three regions: Japan, North America, and international markets, despite Toyota posting unit sales growth in each geography over the quarter. According to the company, 205 billion Yen ($1.88 billion) of the loss in operating income was attributable to the change in foreign exchange rates.

Over the past month, the Yen has appreciated against the dollar. This means that any revenue recorded in dollar terms is more valuable when Toyota reports its revenues in Yen. North America is Toyota’s biggest market and its second most valuable. The Japanese auto maker has dominated the small car segment in this market and its luxury brand Lexus ended the previous year as the second highest selling brand in the U.S., the world’s second biggest luxury car market. However, the company hasn’t been able to sustain those positions in the first three months of 2017.

In the January-March period, Toyota brand sales declined by 4% compared to last year, while Lexus brand sales declined by 16.7%. Consolidated Toyota sales declined by 5.6%. Sales of both of Toyota’s highest selling vehicles — Camry and Corolla — declined by 13.3% and 7.9% respectively. A bright spot for the company was the growth in sales of Toyota’s SUVs RAV4, Highlander, and 4Runner by 5.8%, 20.6%, and 23.8%. Toyota’s performance in the U.S. market is not unlike that of its fellow Japanese auto maker Honda, which has also seen its overall sales growth propped up by the growth in sales of SUVs as passenger car sales in the U.S. auto market continue to decline.

Encouragingly for the company, its performance in Japan and that of the Japanese car market in the first three months of 2017 was excellent. After tepid relative performance in the past few years, the Japanese car market grew by 7.8% in the first three months of 2017. Toyota grew much faster than the market  at 14.5%, increasing its market share from 32.43% to 34.46%. Meanwhile, the Chinese automotive market grew by 7% for the first three months of 2017, with sales of passenger growing by just 0.59%. Toyota’s vehicle sales over the month of March grew by 11.9%. The Chinese market is a huge opportunity for Toyota as it sells far fewer units than GM and Volkswagen, and the market has a lot of scope to grow.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Toyota Motor

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