Toyota Earnings: Prepare for Huge Profits

Strong sales of Toyota's all-new Corolla helped boost profits last quarter. Photo credit: Toyota

Toyota (NYSE: TM  ) said on Wednesday that it made a net profit of 438.4 billion yen, or about $4.4 billion, in the most recent quarter.

That's up a whopping 70% from a year ago, but it was roughly in line with Wall Street estimates. Exchange-rate movements have helped Toyota boost its profit margins in a big way this year.

Those boosts are apparently expected to continue. Toyota's executives are normally very conservative with guidance, but they set some big expectations on Wednesday.

A sharp hike to already big profit expectations
Toyota's profit forecast for the current fiscal year -- Toyota's fiscal year ends on March 31 -- is now 1.67 trillion yen, or just under $17 billion. That's an increase of 13%, or almost $2 billion, from its guidance last quarter.

It's also a huge number for an automaker, almost certainly enough to make Toyota the most profitable automaker in the world. Volkswagen (NASDAQOTH: VLKAY  ) took that title last year, on the strength of its surging Audi luxury brand, but rising costs are expected to keep VW short of Toyota's expected profits for the current year.

So, what's driving these huge gains? Plain and simple, Toyota continues to execute well on business fundamentals while it benefits in a big way from the Japanese government's monetary policies. 

Those policies have pushed the yen down relative to other major currencies like the dollar and the euro. That makes exports from Japan cheaper in dollar terms -- and it means that the dollars earned by Toyota here in the U.S. are worth more money in terms of yen back home.

Big profits, but a continued focus on basics
That currency advantage has increased Toyota's profit margins in yen terms. It has also given the automaker room to reduce its dollar-denominated prices while preserving its yen-denominated profits, something that rival Nissan (NASDAQOTH: NSANY  ) has used to its advantage recently.

But Toyota continues to pay close attention to basics. Despite the financial breathing room created by the yen's devaluation, Toyota Managing Officer Takuo Sasaki told reporters on Wednesday that the company had no intention of easing its recent aggressive focus on controlling costs.

Toyota is on track to be the world's best-selling automaker in 2013. But Sasaki did acknowledge that Toyota would need "aggressive investment" in new models and more advanced technology in order to preserve that advantage, as huge rivals like VW and General Motors (NYSE: GM  ) continue to make big investments in aggressive expansion efforts of their own. 

But will Toyota move aggressively enough to match rivals?
Generally speaking, Toyota is a very conservatively run company. Its products tend to be safe bets rather than daring designs, its executives focus closely on controlling costs, and the company is very careful with cash -- its dividend is tiny, despite its big profits. 

That's not to say that Toyota doesn't innovate. To take just one example, Toyota sells more hybrids than any other automaker, by far. But some analysts have been concerned that Toyota's discipline might hold it back from making the aggressive investments it will need to keep pace with its giant rivals -- and to drive meaningful profit growth once the yen's devaluation is less of a factor.

Sasaki seemed to address those concerns on Wednesday. But it will take big investments -- and bold action -- before some investors are convinced. 

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