Toyota Motors (NYSE:TM) is scheduled to announce its Q2 earnings on November 6. The yen devaluation has played a huge role in lifting the automaker’s profits. Ever since Shinzo Abe stepped into the PM’s office late last year, the yen has depreciated ~25% against the dollar. This has benefited the country’s automotive companies since the overseas profits now translate back to more yen. In fact, Toyota expects operating margins to exceed 7.5% in fiscal 2014. This will be a significant improvement from the 6% mark posted in the previous fiscal year.
We have a $120 price estimate for Toyota, which is about 10% lower than the current market price.
During the first quarter earnings, the company raised its guidance and now expects net income of 1,480 billion yen (~$15 billion) for fiscal year 2014, up from the previous estimate of 1,370 billion yen.  Although the profit guidance is very aggressive, challenges still remain for Toyota due to its inability to gain market share in its key markets.
American Operations Stable
Although demand for Toyota’s vehicles remains strong in the U.S with sales up 8.1% to 1.7 million units through September, the automaker has barely managed to maintain its market share. With the 2014 version of the Corolla release, the automaker expects the full year sales of the refreshed model to top 300,000 units this year. Furthermore, sales could accelerate to 330,000 units next year. Until September this year, Toyota had sold 233,547 units of Corolla in the U.S. 
The success of the new Corolla is all the more important for Toyota now that the Camry isn’t selling as briskly as it used to. Although the Camry continues to be the best selling car in the U.S., its sales were flat through September. The revamped versions of the Accord and the Fusion are becoming popular among the American public. Moreover, the Camry isn’t getting refreshed anytime soon.
Toyota also sees some upside in the light truck segment, a category that has traditionally been dominated by American auto companies. The light truck category consists of pickup trucks, SUVs and crossovers. Pickups are a lucrative segment for any automaker since they typically have higher margins compared to mainstream cars. Earlier in the year Toyota released the 2014 version of the Tundra pickup, which is more muscular and spacious, giving it a distinct American look. However, grabbing a foothold in the light truck segment is more of a long-term project for Toyota and its impact on the upcoming earnings will be limited.
After tensions broke out between China and Japan last year over claims on the disputed islands, Japanese brands have fallen out of favor with the Chinese public. The anti-Japanese sentiment still lingers among the general public, and this continues to impact sales of Japanese car companies. Sales were weak in the first half of the year but have now begun to stabilize. Toyota’s unit sales in China are up 4.9% through October to 719,200 vehicles. 
The situation is still fragile and any news or event that reignites tensions between the two nations could once again drag down the sales.
Weak Japanese Automotive Market
Toyota’s performance in its home country is likely to remain weak this year. Japan’s automobile market was artificially boosted last year with the help of government incentives. With the subsidies ending late last year, the automobile market was expected to decline this year.
It is not just Toyota whose sales have suffered; the entire automotive market was down 4.8% in the first nine months of the year. However, Toyota’s performance was even worse with sales down 10%. Japan accounts for about a fourth of Toyota’s sales, so losing market share on its home turf could threaten the automaker’s long-term profitability. Notes:
- Toyota Motors Investor Relations
- U.S auto sales, wsj.com
- Toyota says Oct China auto sales up 80.6 pct y/y, November 1, 2013, reuters.com
- New registration sales, Japan 2013
Disclosure: No positions