Toyota Motors' (TM) stock surged more than 2% when the automaker reported a net profit of $3.2 billion, which was more than three times its net profit a year ago. Revenue also increased by 18%. The Japanese automaker performed well in both Japan and North America, the two regions from which it gets most of its revenue. The company has been losing out in China due to the Senkaku/Diaoyu island dispute between China and Japan. However, despite a massive loss of sales in China, the company still managed to push the global net profit forecast up from $9.45 billion to $9.7 billion, which reflects its strong performance in other parts of the world.
The company recorded increases in both sales and net income. The enormous increase in revenue is attributed to the fact that sales were extremely depressed last year because of the destruction caused by the Tsunami in Japan.
The company also raised its net profit guidance by almost 3%. This was a positive surprise for investors, who were expecting the company to reduce profit guidance because of declining sales in China. However, bears believe that weak operations in China took a toll on sales figures, as the company lowered its sales forecast from $273.5 billion to $264.8 billion, which is almost a 3% reduction. The company also lowered production guidance from 8.8 million to 8.75 million units.
Following shows the geographical revenue distribution for Toyota's operations:
The management cited strong Japanese sales as one of the reasons behind strong results for the second quarter. Deliveries in Japan rose by 20% YoY. The growth in car deliveries came after the government subsidized fuel-efficient cars.
US Auto Market:
The company gets more than a quarter of its revenues from the US. The US auto market has been consistently strong over the last couple of months. The September SAAR figure was exceptional, at 14.9 million, almost 3% more than the estimated 14.5 million figure. Had Hurricane Sandy not affected the operations of the company in the last week of October, the month of October would have posted strong results as well. Despite that, the US market reported a SAAR of 14.2 million. However, many believe that the hurricane will push most of October's last week's sales to November, or even December. There will be many car owners who will want to swap their damaged cars. There will also be some customers who could not make it to car showrooms due to the hurricane. According to Edmunds, historically, the last week of October accounts for almost 30% of overall October sales.
According to Toyota's Vice President, despite the hurricane, October was a good month for the industry, and the industry will keep on showing such strength in the near future. Toyota's sales increased by almost 16%; the company sold 155,242 units compared to 134,046 units sold a year earlier. The market share of the company also increased to 14.3%, an increase of 1.1%. The company enjoys the third largest market share in the US, after General Motors Company (GM) 18% and Ford Motor Company (F) 15.1%.
Toyota's cars were among the most popular in North America. The Toyota Camry was reported as the best-selling car in October as well as for the ten months ended in October. Toyota's Corolla and Prius were also in the list of top ten best selling cars by volume:
Toyota's Tacoma made it to the list of top ten best selling light trucks.
For the quarter ended, the company reported a 45% surge in net profits, from $413k last year to $598k in 2012. The Toyota division posted a rise of 16.8% in sales. The Lexus division reported a rise of 9.7% in revenue.
Toyota has been hit hard by the Sino-Japanese island dispute. The company estimates the loss in sales to be around 200,000 cars. The sales of the company, and of its two joint ventures with China, have almost halved in September and October due to the protests. TM expects the impact of sales losses on its full-year net profits to be almost 30 billion Yen ($373 million).
However, bulls are still optimistic about the company because it does not rely as heavily on sales from China as some other Japanese auto manufacturers. The company gets almost 12% of its revenue from China, which is less than Nissan Motor Co's (NSANY.OB) 27 percent and Honda Motor's (HMC) 20 percent.
No one knows exactly when the Sino-Japanese tensions will subside. An auto analyst at Barclays was reported saying:
"I think the market hopes for a recovery in January-March, but I don't really see what's going to drive that."
The company is focusing on trimming its costs. The company has increased its forecast for net profits but lowered the revenue outlook for 2012. TM expects to save almost 300 billion Yen in profits this year.
The company sold a total of 7.4 million vehicles in the first nine months of the year. That is more than the sales of any other car manufacturer in the world. Therefore, the company is well on its way to becoming the leading carmaker of the world, a position that it enjoyed from 2008 to 2010. The important thing to mention here is that the improvement in sales and market share did not come from incentives because the company had scaled back its discount. The average incentive per car dropped from $2,368 a car in the same period last year to $1,899 for this quarter.
The stock is currently trading at a cheap multiple of 9x. It also pays a dividend yield of 1.91%. The company topped three of its last four earnings estimates. The sell-side expects the company's earnings to grow by 41% per annum for the next five years.
Given the strong results for this quarter, despite poor sales in China, more focus on cost restructuring and improved performance in Japan and North American, the stock is recommended as a buy.
Key Risks: Fx headwinds (Appreciation of JPY)