There’s conservative and then there’s Toyota Motor Corp. (7203)
The world’s largest carmaker yesterday forecast profit and revenue that missed analysts’ estimates, based on outdated projections for the yen to trade at 90 against the dollar and 120 versus the euro this fiscal year. The Japanese currency is trading closer to 100 and 130, with analysts projecting it to weaken even further.
That means the company has room to beat its forecast for profit to climb to a six-year high as Toyota estimates it earns about 40 billion yen ($405 million) every time the Japanese currency drops by 1 yen against the dollar. The weakening yen, whose strength had shackled Japanese exporters for a half decade, is now giving President Akio Toyoda an edge to compete with General Motors Co. (GM:US) and Volkswagen AG. (VOW)
“They got between a 400 to 450 billion yen buffer from their currency assumptions,” said Ben Williams, a London-based fund manager at GAM (U.K.) Ltd., overseeing about $300 million in Japanese equities. Yesterday’s earnings figures were “neutral to positive,” he said.
Shares of the Toyota City, Japan-based company fell 1.4 percent to close at 5,760 yen in Tokyo trading. They’ve rallied 88 percent since mid-November as Prime Minister Shinzo Abe helped reverse the appreciation of the yen, adding about $94 billion in market value -- almost quadruple the size of Cyprus’s economy.
Toyota calculated the yen forecasts by averaging exchange rates in March and rounding them, spokesman Masami Doi said. The projection doesn’t take into account business conditions or domestic production levels, he said. The yen averaged at about 95 against the dollar in March.
In general, it’s better to round the exchange rate in a safer way in the event the rate deteriorates and negatively impacts earnings calculations, Doi said.
Toyota isn’t alone in being conservative. Fuji Heavy Industries Ltd. (7270) and Nintendo Co. are predicting the same exchange rates. Showa Shell Sekiyu K.K. is even forecasting 84 against the dollar -- a level not seen since December. Honda Motor Co. and ANA Holdings Inc. are closer to reality, projecting 95.
Even with conservative yen projections, Toyota is looking forward to its highest profit in six years. Net income will probably increase 42 percent to 1.37 trillion yen in the 12 months ending March 2014 after tripling last fiscal year, the company said yesterday.
Reversal of Fortune
Toyota’s improving prospects illustrate how fast Japan Inc. is reversing its fortunes. Six months ago, the yen was still roiling corporate earnings by trading near postwar highs, and Toyoda was warning that manufacturing in Japan was hollowing out.
For Toyoda, 57, relief couldn’t come soon enough. Since he ascended to the presidency in 2009, he’s dealt with a strong yen, the humbling recall of millions of vehicles, as well as natural disasters in Japan and Thailand. Sales in China have been falling since September.
“With the weaker yen, this should be a good year for Toyota,” said Edwin Merner, president of Atlantis Investment Research Corp. In Japan, “the mood is good, it’s getting better, and you can expect for people to buy more,” he said.
Profit last quarter more than doubled to 314 billion yen as income from Japanese operations unexpectedly tripled to 309.8 billion yen, or 57 percent higher than the average estimate in a Bloomberg survey of five analysts. Profit from Japan was twice that of North America, Europe and the rest of Asia combined.
Outside Japan, earnings weren’t as good.
Profit from North America, Toyota’s largest overseas market, was 39 percent below the average analyst estimate, as the company faces a resurgent Detroit where GM, Ford Motor Co. and Chrysler Group LLC are offering their best vehicle lineup in a generation. Toyota’s market share in the U.S. has fallen to a 15-month low.
In other Asian markets, profit was 12 percent below estimates as demand from China -- where consumers have been shunning Japanese brands since a territorial dispute flared in September -- shrank for a third straight quarter. Toyota’s slide continued in April and the company’s China head, Hiroji Onishi, said last month that a full recovery won’t occur before autumn.
In Europe, Toyota also fell victim to the economic slump in the region, where industry sales are headed to a 20-year low. Profit from Europe fell to 5.1 billion yen, less than half the average analyst estimate.
Back at home, the outlook is brighter.
“Exporters can become more optimistic on the domestic production side,” said Martin Schulz, an economist at Fujitsu Research Institute in Tokyo. “Toyota’s entire network of suppliers looks so much more happier. This lifts sentiment.”
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