Buoyed by a weak yen and a strong recovery following the tragic Japanese tsunami, Toyota Motors (NYSE:TM) announced a solid fourth quarter and fiscal 2013 earnings. Total revenues jumped 18.7% to 22.0 trillion yen ($220 billion). Its net income of 962 billion yen (~$9.7 billion) exceeded its own guidance [Toyota Motors Investor Relations].
Toyota’s shares have gained more than 40% in the last six months helped largely by a depreciating yen, which has boost its overseas profits. Ever since Mr. Shinzo Abe took over as the Prime Minister in December, the yen has fallen more than 25% against the U.S. dollar. In fact, the yen recently breached the 100 level mark against the dollar for the first time in four years.
The forecast guidance was quite optimistic with the automaker hoping to sell 10.1 million vehicles in the fiscal beginning April (vs. 9.6 million vehicles sold in the preceding 12 months). If Toyota is able to reach its target, it would be the first automaker in history to sell more than 10 million vehicles in a year. At the same time, the automaker expects its operating margins to exceed 7.5% in fiscal 2014, which will be a significant improvement from the current level of ~6%. The net income is expected to swell 42% to a whopping 1.37 trillion yen, or about $13.7 billion.
Challenges Still Remain
A weak yen will certainly boost the per-car profit but gaining volumes will still be a challenge for the company. Some of its perennial best sellers such as the Corolla and the Camry now face more competition than ever. Toyota’s sales in the U.S. even turned negative in April. In the U.S., the Camry was displaced as the highest-selling car by the Accord. Similarly, Ford Fusion and Honda Civic are now more popular with the American customers than the Corolla [U.S. auto sales, wsj.com]. The Corolla, though, will be refreshed later this year, so sales might pick up in the second half of the year.
China also continues to paint a worrisome picture. The company’s performance in the world’s largest auto market just cannot be ignored. The anti-Japanese sentiment still lingers on among the general public and this continues to impact sales of Japanese car companies. Toyota, which had earlier forecast its sales to normalize by the middle of the year, now expects the sales to recover not before fall this year. Other non-Japanese automakers are gaining sales at the expense of Japanese companies. Ford, which has traditionally dwarfed other major automakers in China, recently overtook Toyota.
Back home, Toyota will have a tough year as the overall Japanese sales are expected to remain tepid this year. Japan’s automobile market was artificially boosted in 2012 with the help of government incentives. Now that the subsidies have ended, the automobile market is expected to decline this year. Toyota estimates its own sales to drop 10% to 1.45 million in fiscal 2014. It is quite clear that a weaker yen will boost Toyota’s profits as evidenced by the latest earnings. However, Toyota might find itself failing to generate the required volumes due to some of the aforementioned reasons.
We currently have a $105 price estimate for Toyota’s stock, but we are in the process of revising our estimates to incorporate the latest earnings.
Disclosure: No positions