Nissan Motor Co. Finishes 2013 on a High Note, but Warns of a Modest Year Ahead

Nissan (NASDAQOTH: NSANY  ) reported its fiscal 2013 earnings on May 12 with net profit beating both analyst estimates and its own guidance. True the company had lowered the bar when it cut its profit forecast by 15% last November; nonetheless the double-digit revenue and earnings growth cheered investors. Speaking about the results, Max Warburton, analyst at Sanford C. Bernstein in Singapore, told Bloomberg: "These numbers show Nissan at a turning point." Let's find out what lies behind these numbers.

Nissan Altima 3.5 SL Sedan, Source: Nissan.

Double-digit revenue growth
Nissan's sales growth outperformed the industry in all its major markets, be it North America, China, Japan or Europe. Total sales volume increased 5.6% to 5.2 million units and revenue jumped 20% to 10,482.5 billion yen ($104.62 billion) aided by favorable currency impact. 

Here's a look at Nissan's sales performance in FY 2013:

Source: Company presentation (link opens a PDF). Sales figures in thousands.

Solid performance in North America was the brightest spot as it's the company's biggest market where Nissan was struggling to grow its sales. But in fiscal year 2013, the automaker exceeded its target of 1.61 million unit sales in North America backed by higher incentives, and new models that included the redesigned Altima and Rogue crossover the. Sales volume in the U.S. beat company guidance of 1.27 million units, and rose 13% to 1.285 million units from last year. 

In Japan, Nissan saw higher sales of the DAYZ series, CMF model, and wide acceptance of the X-Trail. In the fourth quarter, sales volume spiked 18.9% as buyers hurried to the showrooms to buy cars before the sales tax rate increase from April 1. In China, volumes picked up in the second half with the launch of the redesigned Sylphy, as well as other new Venucia and Infiniti models. Europe remained weak, though Nissan's growth rate topped the market. 

Robust earnings and strong cash generation
Net income rose 14% to 389 billion yen ($3.88 billion) or 92.82 yen per share ($0.92). Nissan's operating income edged up 13.6% over last year to 498.4 billion yen and operating margin stood at 4.8%. The carmaker managed to save 202.6 billion yen ($2 billion) in purchase costs, and currency gain added a good 247.6 billion yen ($2.4 billion). 

Nissan's cash balance grew 17% year over year to 832.7 billion yen ($8.2 billion) in 2013, aided by solid cash from operations that shot up 77%. The carmaker reported free cash flow of 208.1 billion yen, down from 248.6 billion yen that it reported last fiscal year. The decrease was mainly on account of heavy capex of 560.7 billion yen. Nissan is building four new factories and adding one more capacity.

Future plans
Nissan has some big targets before it. As part of its "Power 88" mid-term plan it's trying to achieve 8% global market share and 8% operating margin by 2016-2017. For the fiscal year 2014, the company forecasts 8.9% improvement in sales volumes. It's planning to sell 5.6 million units globally, and increase its global market share from 6.2% in 2013 to 6.7%.

The company has formulated a brand strategy whereby it's customizing its products according to the needs of different groups of buyers. For the high-income group there's the premium Infiniti brand, for the cost-conscious crowd there are the Datsun and Venucia brands, and then there's the flagship Nissan brand for the middle-income customers.

Among major markets, Nissan is most optimistic about China and is expecting 17.6% volume growth from there, while it hopes to generate 6.8% incremental vehicle sales from North America. It's also betting on Europe's recovery and gunning for 15.4% higher sales. Japan may see 11% lower volumes due to a hike in the sales tax rate, which is likely to hurt demand. However, Nissan's entire volume growth will not be visible in the revenue numbers as the currency benefit will wane. The company expects a modest revenue growth of 2.9% to 10,790 billion yen in fiscal year 2014. 

Even as it outlined its sales goals, Nissan management made it clear that its priority is to attain its targeted 8% operating margin. Though the company expects just 5% operating margin in fiscal year 2014, it's hopeful that it will meet its mid-term targets.

Nissan has undertaken "monozukuri" activities, which aim at adopting efficient production methods and building team cooperation for better synergies. Through this initiative the automaker expects to generate 5% sustainable savings in total cost each year. Margins will also get a boost once production begins at the new factories. In fiscal year 2014, Nissan is looking at a net income of 405 billion yen ($4 billion), 4.1% higher than the past year.

Last words
Nissan's capacity additions, positive sales trends, and cost reductions are gradually taking it closer to its mid-term objectives. Though challenges like a strengthening yen, stiff competition in the U.S., and a higher sales tax in Japan could have an effect on the results, the company has its strategies in place to generate growth.

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8/28/2015 4:00 PM
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Nissan Motor CAPS Rating: ****