Ouch: Toyota (NYSE: TM) reported today that its third-quarter operating profit was down 19% versus year-ago numbers, to $970 million, on lower sales due to ongoing production disruptions from the March tsunami in Japan.
That was far below consensus analyst estimates of around $1.3 billion, and the stock tumbled sharply after the earnings release. The drop wasn't that much of a surprise, though, as those production disruptions have caused well-documented inventory issues for Toyota around the world. Things were supposed to start getting better for the company in October, after the quarter ended -- but widespread flooding in Thailand caused further supply disruptions that wrought havoc with that plan.
Toyota executives said they still can't assess the effect of the Thai floods and have withdrawn previous profit forecasts. Meanwhile, the yen's strength is squeezing margins, adding to the pressure on the beleaguered automaker. Is there any end in sight to Toyota's troubles?
Thai floods continue production disruptions
Like rival Honda (NYSE: HMC), which has halved production at some plants, Toyota has seen extensive production disruptions as a result of the Thai floods. Many key suppliers to the Japanese auto giants have plants in Thailand, and the floods have led to shortages of critical electronic parts, forcing both automakers to slow or even stop many production lines. Other automakers, notably Ford (NYSE: F), have seen a few disruptions, but not on the scale of those affecting Toyota and Honda.
And like Honda, which declined to give guidance when it reported earnings last week, Toyota said on Tuesday that it needs more time to assess the effect of the Thai disaster before giving any sort of financial forecast. Toyota estimates that by mid-November it will have lost production of about 150,000 vehicles around the world as a result of the Thai floods. That hurts, but the good news is that a recovery is expected sooner rather than later: Unlike Honda, Toyota's own factories in Thailand escaped flood damage, so a return to full production should take weeks, not months.
A series of problems let rivals gain ground
While the floods may have only a short-term impact on Toyota's production, it's only the latest in a string of events that has undermined Toyota's profitability and leadership among Japanese automakers. Toyota was the world's most profitable automaker before the financial crisis, but a quality scandal, the tsunami, and now the floods have eroded the company's market position around the world.
In Japan, Nissan (OTC: NSANY) has been able to take advantage of the predicaments affecting both Toyota and Honda. Whether through luck or skill, Nissan has so far escaped significant production disruptions, allowing it to gain market share in Japan and the U.S. on the strength of a solid product line. And in the U.S., Hyundai (OTC: HYMTF) and a resurgent General Motors (NYSE: GM) have both seen market share gains as a result of Toyota's woes, with GM's Chevrolet Cruze taking over the Toyota Corolla's long-held position atop the compact-car sales charts for several months.
Toyota's U.S. market share has fallen from a GM-rivaling 17% in 2009 to about 12.6% through October. The company is unlikely to recover that ground anytime soon, as rivals like GM, Hyundai, and Ford have far more competitive products now and have won over some of Toyota's longtime customers. But Toyota's outlook should improve incrementally as production and inventories finally recover -- at least from a sales perspective.
But a recovery in profits may be more of a challenge.
A billion-dollar disadvantage
The appreciation of the yen against other major currencies has clobbered Toyota's margins, which sells in many different countries but books its profits in yen. Toyota executives have said in the past that the yen's strength against the dollar costs the company about $4,000 in profits per vehicle, on average, and the company said on Tuesday that the yen's strength cost it about 80 billion yen -- a billion dollars -- in profit in the quarter.
The Japanese government intervened in exchange markets last week, hoping to bring the yen down a bit. But the effect wasn't significant, and Toyota CEO Akio Toyoda yesterday called on his government to do more, quickly, lest Japan's auto industry experience a "collapse."
The outlook: Cloudy
Assuming the yen drops to a rate of 85 to the dollar, CFO Satoshi Ozawa said, the company will break even on sales of 7.5 million vehicles around the world next year (the company sold about 8.4 million vehicles in 2010). But with the yen currently trading around 78 to the dollar even after the government intervention, predicting profits will remain a challenge even after production is restored, he said.
Despite the profit squeeze, Toyota remains the world's most valuable automaker, with a market cap over $110 billion. But that value is eroding -- shares have fallen more than 20% so far this year, and were down more than 2% in midday trading today as investors around the world digested the company's sobering report.
Making up lost sales ground in the U.S. and Japan will help Toyota's profits somewhat. But until the company -- or the Japanese government -- finds a way to deal with the yen's strength, Toyota's quarterly numbers are likely to remain muted. Long story short: Even if sales recover, Toyota's share price may not follow for a while.
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