Toyota's Latest Blowout

Did you think Toyota (NYSE: TM  ) would make it through months of expensive recalls and bad publicity with its finances unscathed?

Neither did I. But apparently, we both need to think again.

On Tuesday, Toyota reported borderline surreal results for its full fiscal year, which ended in March. While net revenues fell 7.7%, the company posted a full-year profit of 209 billion yen ($2.26 billion), up from a loss of 437 billion yen ($4.73 billion) in the year prior.

And for the most recent quarter? A quarter that saw sharp sales declines in the U.S. market? A mere 112 billion yen profit, up from a 765.8 billion yen loss in the first quarter of 2009. In dollar terms, that's a $1.2 billion profit, up from a whopping $8.29 billion loss.

All things considered, that's an impressive result. How did Toyota do it? And can the company sustain this pace?

The China syndrome
Toyota's earnings release, which reads like it was translated from Japanese in a hurry, attributes the increase to two factors: "cost reduction efforts" and "the reduction in the fixed costs," without spelling either of those out in detail. (Um, what?) But drilling down into the details, I think the company's trying a little too hard to look modest.

While Toyota's presentation didn't break out China specifically, it's clear that as with rivals Ford (NYSE: F  ) , General Motors, and to a lesser extent Honda (NYSE: HMC  ) , the booming Chinese car market is a key source of strength for Toyota right now. Sales in North America and Europe were down year over year, and overall sales fell, but increases in Japan and Asia made things much better than they could have been. For the quarter, sales rose 49% overall.

Fast forward?
Toyota management's outlook for the upcoming year reflects the fruit of those cost-reduction efforts. The company predicts a 48% increase in net profit, while expecting year-over-year sales to stay essentially flat. Ratcheting down the aggressive incentives in the U.S. will help profitability, and the company predicts a continued recovery in sales here, but that will be largely offset by the end of Japan's government incentives program in September.

That program, which offers incentives for the purchase of fuel-efficient cars and the scrapping of old ones, has been a big boon for Toyota's Prius. How big? The Prius has been Japan's best-selling car for 12 months in a row, and there's still a six-month waiting list to get one. An end to the government's program is likely to put a damper on those sales.

But that's not the only potential cloud on the horizon. The U.S. Department of Transportation launched a new investigation of Toyota on Monday, this time focusing on possible delays by the company in reporting steering problems on 4Runner and T100 trucks in 2004 and 2005. While additional fines are unlikely to significantly affect Toyota's financials, an investigation that reignites U.S. public and Congressional ire could once again send Toyota's North American sales into a tailspin.

And while I'll leave the "are-bubbles-brewing-in-China?" debate to my fellow Fools, a list of potential headwinds for Toyota wouldn't be complete without a wary look at the state of the Chinese economy and the sustainability of its growth. A Chinese recession wouldn't be a mortal wound for Toyota, but it would put a damper on its growth hopes -- and that wouldn't help management recover its bonuses.

Wait. Management lost its bonuses?
Yes indeed. In an intriguing move, Toyota has suspended bonuses for many senior managers, and it's asking directors to return some of their compensation. According to CEO Akio Toyoda, as quoted in The Nikkei, this is part of the company's effort "to show our firm, renewed resolve to improve quality." It's certainly an impressive display of seriousness, but only time will tell if the new and more humble Toyota is back on track.

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Fool contributor John Rosevear's new car would not impress the Japanese government. He owns shares of Ford, which is a Motley Fool Stock Advisor recommendation. You can try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 12, 2010, at 8:03 PM, baldheadeddork wrote:

    I've got a different take on Toyota's year-end results, John. The timing of their fiscal year couldn't have been better planned to minimize the financial effects of the recall. The record incentives in March erased most of the sales lost in February, and they hadn't yet incurred any substantial costs from the recall.

    That situation is going to change quickly starting in the first quarter of this year. The incentives are going to erode profitability, and as we discussed when the April sales numbers came out, the April sales for Toyota were far below analysts estimates and disproportionally lower given that Toyota's incentives were up over 50% compared to last year. Were the huge March numbers a one-time surge? Did they pull forward sales from customers who were already planning to buy?

    At the best, Toyota still sells a lot of cars but is going to make $1000 less per vehicle as long as their incentives are in the $2400 range. That is going to add up quickly, and depending on the value of the dollar, might make it tough for Toyota to be profitable at least through the second quarter. (Then they have to figure out how to keep sales up while weening customers from fat incentives.)

    The bad news is if the April numbers were the start of a trend and Toyota loses market share even though they're offering record incentives. If Toyota has to choose between offering Detroit-level incentives or seeing their sales wilt create excess capacity, the results either way are going to be a big hit on profits.

    And this is before the first dime of liability costs come in.

    Toyota's darkest hours are ahead. I think the May and June numbers are going to be critical. If they offer March-sized incentives and don't get March-sized sales improvements, they're looking at a very long year.

    One last thing to put TM's profits in perspective: Ford made more money in 2009, even though their FY ended before the February/March/April sales surge. Ford's Q1/10 overlapped Toyota's Q4/09, and Ford made nearly four times as much as Toyota.

  • Report this Comment On September 13, 2010, at 12:24 PM, aiyanalunette wrote:

    I recommend using NJ Toyota check them out at http://www.1800autoland.com

  • Report this Comment On September 20, 2010, at 2:38 AM, Jehnavi wrote:

    Toyota coherent vision for the coming year of the fruit of these efforts to reduce costs. http://www.financeandmarkets.net/a-yen-for-growth.html The company expects to increase net profit by 48%, waiting years to accommodate the sale of essentially constant. Ratcheting down the aggressive incentives to help the profitability of American companies anticipate and continuous shooting on sale here, but has been largely replaced by the end of the Japanese government incentives for the program in September.

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