I've written several articles recently detailing how the persistent strength of the Japanese yen is negatively impacting Japanese exports. In a sign of just how damaging the yen's appreciation has become, Toyota (NYSE:TM) lowered its profit outlook by no less than 54% last Friday. According to the Wall Street Journal, the company now expects its net profit to be around $2.32 billion, "less than half [of what] it earned last year," and less than half of what analysts were expecting.
While the immediate cause of the company's profit shortfall seems to be the fact that Thailand's massive flood has disrupted the production of Toyota's best-selling Camry and Prius models, the real problem is in fact traceable to the rise of the yen. In an effort to escape the strong yen, auto parts manufacturers have begun to relocate some of their operations outside of Japan to places like Thailand. When the flood hit, these parts makers experienced a disruption in their operations, ultimately costing Toyota "260,000 vehicles in lost production," more than four times the amount of vehicles lost by rival Nissan according to Bloomberg.
Exacerbating the problem for Toyota is the fact that it still makes half of its vehicles in Japan. By contrast, Honda (NYSE:HMC) and Nissan (OTCPK:NSANF) produce nearly 70% of their vehicles abroad, mitigating their currency risk. Things are unlikely to get better any time soon. With the specter of the European debt crisis still hanging over markets, the yen is likely to remain strong--Toyota's new forecast "assumes an average exchange rate of 77 yen to the dollar" for at least the next four months.
On top of everything, recalls have been a nagging issue for the company. In November, Toyota announced that it was recalling more than half a million vehicles worldwide due to a faulty crankshaft pulley. In the wake of the company's profit warning, S&P now projects earnings of just $1.53 per share meaning that at its current price, Toyota is trading for nearly 42 times 2012 earnings.
So that's the bad news. The good news is that if you believe Toyota will recover in 2013, you can pick up the shares for about what they traded at during the 2008-2009 financial crisis. The company has a strong balance sheet and S&P expects earnings to grow by 142% in 2013 to $3.70 per share, meaning that the company currently trades for 17 times 2013 earnings, a very reasonable multiple.
Toyota plans to resolve all of its problems regarding shortages from Thailand's parts manufacturers by the second quarter of next year and given that it is now basing its projections on a yen to dollar exchange rate of around 77, the company could indeed benefit from further interventions into the currency market by the Bank of Japan. At $64, Toyota shares are a bargain. The company isn't going away any time soon and should learn from its mistakes. Additionally, between the record high yen, the European financial crisis, an earthquake, and a flood, the company has suffered from one 'once-in-a-lifetime' event after another, something that is unlikely to reoccur in the future. Expect Toyota to right the ship in 2013. Often the best time to buy is when everyone else is selling. This is that time for Toyota shares.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TM over the next 72 hours.