Toyota Trims Earnings Outlook - Analyst Blog

Toyota Motor Corp. ( TM ) has sharply cut its earnings outlook for the fiscal year ending March31, 2012 due to a strong yen and severe flooding in Thailand that disrupted its parts supply chain.

The automaker expects to record a profit of ¥180 billion ($2.3 billion) for the year, which is less than half compared with the previous forecast of ¥390 billion made in August and the year-ago profit of ¥408.18 billion.

The company also expects revenues of ¥18.2 trillion ($234.4 billion) on global sales of 7.38 million vehicles for the year. This compares with the previous revenue forecast of ¥19 trillion on sales of 7.6 million vehicles and the year-ago level of ¥18.99 trillion on 7.31 million vehicles.

Toyota could not provide any guidance for vehicle unit sales, net revenues and earnings for the fiscal year while announcing the second quarter results of the year. The company had revealed that it needs more time to complete the examination of production and sales plans due to the impact of floods in Thailand.

The Twin Factors

Toyota believes Thai floods will reduce the operating profit by ¥120 billion ($1.5 billion). Recently, the company revealed that it lost production of 150,000 vehicles, including 90,000 units in Thailand and 40,000 units in Japan due to the severe floods that killed several people and broke the country's infrastructure.

However, Toyota's compatriot Honda Motor Co. ( HMC ) is worst hit among the Japanese automakers due to the flooding. The automaker is yet to release its forecasts for the fiscal year.

The lost production in Thailand is expected go up to 250,000 vehicles globally. However, it is lower than 700,000 vehicles in lost production due to the twin disaster in Japan.

Meanwhile, Toyota considers a strong yen to hit operating profit by ¥190 billion ($2.4 billion) for the full year. The yen hit multiple historic highs this year, weakening the results of the ailing company. A strong yen deflates the company's overseas profit after translation, also making its products less price competitive outside Japan.

The company expects yen to average 78 against the dollar for the year, down from ¥80 in its previous forecast. Meanwhile, it assumes an exchange rate of ¥109 against the euro, down from ¥116 in the previous forecast.

What Went Wrong?

Toyota continues to suffer from several factors since the last few years. Firstly, the series of safety recalls since late-2008 tarnished its reputation, resulting in declining sales and lower vehicle resale value.

Since November 2009, the automaker has recalled more than 15 million vehicles globally in more than 20 recalls, surpassing all other automakers. The Transportation Department of U.S. also imposed a fine of $48.4 million due to late recall of millions of defective vehicles.

Secondly, the automaker was hit by the earthquake and tsunami in Japan on March 11, 2011 that severely disrupted its parts supply chain all around the world. The disturbance was so strong that it lost the #1 position to General Motors ( GM ) and Ford Motor ( F ) in terms of sales volumes in the U.S. Thirdly, no sooner the company had recovered from the twin disaster in Japan than it faced another natural disaster in Thailand.

Earnings Recap

Toyota posted an 18.5% fall in profit to ¥80.42 billion ($1.03 billion) in the second quarter of fiscal year ended September 30, 2011 from ¥98.69 billion in the same quarter of prior fiscal year. On per share basis, profits were ¥25.65 (33 cents) versus ¥31.47 in the second quarter of fiscal 2011, missing the Zacks Consensus Estimate of 52 cents.

The continuous decline in profit was attributable to a fall in production volumes and sales volumes all over the world, especially Japan, North America and Europe due to the twin disaster in Japan.

Revenues in the quarter ebbed 5% to ¥4.57 trillion ($58.56 billion) on a 5% fall in sales volume to 1.81 million units. Vehicle sales dipped 14% to 504,780 units in Japan and 20% to 413,836 units in North America. However, it increased 3% to 186,873 units in Europe, 23% to 355,315 units in Asia, and 6% to 344,728 units in Other regions.

Operating income in the quarter slashed 32% to ¥75.39 billion from ¥111.46 billion in the second quarter of previous fiscal year.

The Tailwinds

Despite the backlash from worldwide disasters, Toyota believes an improving world economy, expansion in the emerging markets such as China, technological development, new product launches and higher demand for fuel-efficient compact cars will positively affect its results.

We are optimistic about Toyota's continued effort in developing the hybrid vehicle market. The company occupied the No.1 spot in the market after introducing Prius in 1997. Since then, the automaker has sold more than 3.4 million hybrid vehicles. It expects to launch as many as 10 more gasoline-electric models by 2015 and offer a fuel-sipping option across its entire line-up by 2020.

Zacks Rank

Toyota is the leading automaker in the world in terms of sales and production. Its product portfolio consists of a full range of models from passenger cars, minivans and trucks as well as related parts and accessories. Its domestic competitor includes Honda and Nissan Motor Co. ( NSANY ).

Due to the disappointing results and outlook, the company retains a Zacks #4 Rank on its stock, which translates into a short-term (1 to 3 months) rating of Sell.

FORD MOTOR CO ( F ): Free Stock Analysis Report

GENERAL MOTORS ( GM ): Free Stock Analysis Report

HONDA MOTOR ( HMC ): Free Stock Analysis Report

NISSAN ADR ( NSANY ): Free Stock Analysis Report

TOYOTA MOTOR CP ( TM ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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