Toyota: A Turbocharged Profit Machine

Monster earnings, an ongoing product blitz, and green innovation explain why the automaker is pulling away from the global industry pack

by Ian Rowley

There was plenty of excitement Apr. 24 when news broke that Toyota (TM) had overtaken General Motors (GM) as the world's largest automaker, at least for the first quarter. Well, the Toyota mystique is about to deepen even more when the Japanese automaker reports some simply mind-blowing earnings results on May 9: Think big, really big.

In what's expected to be the best-ever profit results of any Japanese company in history, Toyota is anticipated to announce operating profits of about $18.4 billion for its fiscal year that ended in March. That's up 17% from a year earlier, while net earnings could rise 13% to $12.9 billion. Sales, meanwhile, are expected to grow 10% to $193 billon.

These figures are Toyota projections, and the company does have a history of ultra-conservative forecasting followed by surprises on the upside. Even so, Toyota's projections suggest an operating profit margin of 9.5%, compared to 8.9% last year. That of course is the kind of earnings strength for which executives at GM, Ford (F), and Chrysler (DCX) would die.

No End in Sight

More important, Toyota will dethrone Nissan (NSANY) as the industry's most profitable major automaker measured by operating profit market. Nissan has been struggling of late, and only posted margins of 7.4% in its most recent results, compared to 9.2% last year. Just as dispiriting for rivals, there are few real signs that Toyota's astonishing growth is likely to be derailed anytime soon (see BusinessWeek.com, 4/24/07, "Toyota; A Carmaker Wired to Win").

Sure, the recent surge in profits is expected to slow somewhat over the next few years, but midterm sales and profit projections remain robust. Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo, reckons Toyota's sales will increase to $220 billon by 2009 while net earnings should surpass $15 billion. Meanwhile, a 10% operating profit margin, an aspiration of Toyota President Katsuaki Watanabe, is likely to be achieved a year earlier, in 2008.

Yoshida adds that, even now, Toyota retains a sense of caution that dates back to financial woes in the early 1950s. "Toyota's strength is their balance between the short term and long term," Yoshida says. "They do everything to minimize risk."

Winning at Home

Of course, even Toyota has had its fair share of trials and tribulations. One issue is that, despite a well-honed green image, Toyota's big vehicles are getting bigger, heavier, and not a great deal more fuel efficient. The new Tundra, for instance, is Toyota's biggest-ever truck, while the new Highlander and Sequoia SUVs will also be larger than predecessors. That has led to criticism that Toyota isn't as clean as it makes out. Then there are concerns over quality and whether Toyota's status as No. 1 automaker will bring with it greater scrutiny and even a potential backlash.

Yet you wouldn't sense trouble in Toyota's sales numbers. The company's U.S. sales increased 6.7% through April, compared to falls of 6.5% at GM, 13.6% at Ford, and 2.9% at Chrysler. Among Japanese rivals, sales at Nissan are flat while Honda is up 1.5%. For the four months, Toyota's U.S. market share was 15.7%, compared to Ford's 16.3% and GM's 23.2%.

Why does Toyota keep on growing? One important reason, says Andrew Phillips, an analyst at Nikko Citigroup (C) in Tokyo, is that Toyota isn't just adding big vehicles, but new models in almost every segment.