Japanese Carmakers Set to Rebound

Stocks such as Honda's and Mazda's have been rising, probably because global demand remains solid and woes are exchange-rate linked

by Ian Rowley

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At first glance, the current crop of earnings forecasts by Japanese car companies make for depressing reading. Blaming the stronger yen, a slowing U.S. economy slowdown, and rising materials costs, Honda HMC, Mazda (MZDAF), and Mitsubishi Motors on Apr. 26 all slashed their earnings forecasts, reducing operating profits targets for the year ending March, 2009, by 32%, 29%, and 45%, respectively.

On Apr. 28, Fuji Heavy Industries, owner of Subaru, projected net earnings will slip 44%. "Tough currency and commodities conditions are unfortunately going to erase the effects of a sales volume expansion," Chief Executive Ikuo Mori told reporters in Tokyo. Toyota (TM) and Nissan (NSANY) will also project lower earnings when they announce annual results in May.

Despite the grim headlines, investors don't seem to think the outlook is really so bad. In Tokyo trading on Apr. 28, the first session since Honda, Mitsubishi, and Mazda announced their annual forecasts, the stock prices of all nine listed Japanese automakers actually increased. Mazda surged 7.9%, while Honda and Mitsubishi rose 3% and 2.5%, respectively. That compares favorably with the Nikkei 225 benchmark, which increased only marginally. (The market was closed Apr. 29 for a holiday.)

Forecasts in Line With Expectations

By contrast, for much of this year, shares have slumped. Fearing the impact of the strong yen and a U.S. slowdown on Japanese car companies that have long relied on North American sales for their high earnings, investors have sold off auto stocks. Shares in Honda, for example, which generated over half its revenues in North America in the financial year that just ended, fell 39% between April and mid-March. This month, though, the stock has rebounded 20%. "Perhaps the tide is changing," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo.

What explains the change of mood? One reason is that the forecasts, so far, are roughly in line with or better than what many analysts expected. Honda, for example, is projecting operating earnings of $6.25 billion in the year ending March, 2009. That's almost $3 billion less than this year but around $290 million above the analyst consensus. "Given Honda's penchant for conservative guidance, that's actually quite a bullish number," says Kurt Sanger, an analyst at Deutsche Bank (DB) in Tokyo.

Another factor is that it's the rising yen, rather than stumbling business plans, that explain the weak forecasts. "The headline numbers look pretty awful but other than the foreign exchange impact I don't think things are in too bad shape," says Andrew Phillips, an analyst at KBC Securities in Tokyo.

Strong Sales in Russia for Honda

Phillips points out that all $3 billion of the projected decline in Honda's operating profitability is explained by the yen's sudden rise against the dollar and other currencies. Against the greenback, for example, Honda is projecting a dollar-yen rate of 100, compared to an average of 114 in the previous year. That alone is enough to wipe off $2.4 billion from profits when sales made in dollars are translated back into yen.

Yet when it comes to selling vehicles Honda shows few signs of slowing down, despite weak market sales in the U.S. and Japan, its two biggest markets.