Please ensure Javascript is enabled for purposes of website accessibility

Why Toyota's Profit Growth May Have Stalled

By John Rosevear - Feb 17, 2016 at 4:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Exchange-rate swings have helped propel Toyota to eye-popping profit gains over the last few years. But now, the exchange-rate pendulum might be starting to swing the other way.

Sales of Toyota's RAV4 have been strong, but other factors may be about to put a dent in the Japanese giant's earnings gains. Image source: Toyota.

Toyota's (TM 0.37%) earnings have boomed over the last few years. The company earned $13.3 billion in fiscal 2014 and $18.1 billion in fiscal 2015. And it expects to earn about $19.9 billion in its fiscal 2016 year, which ends on March 31.

However, that string of eye-popping profits might be coming to an end soon. The biggest factor behind Toyota's gains is showing signs of fading.

The rocket fuel powering Toyota's profit gains has run low
That big factor? It's the number of Japanese yen a person can buy for one U.S. dollar.

When Toyota's fiscal 2014 ended on March 31 of that year, one dollar bought about 104 yen, up from about 96 yen a year earlier. A year later, that dollar bought about 120 yen. 

But recently, things have been going the other way: As I write this, a dollar buys just over 114 yen, and it's possible the dollar will slide further over the next few months. 

Currency swings between the yen and the dollar boosted Toyota's earnings to the tune of about 70 billion yen ($612 million) last quarter. On one hand, that's a nice windfall. 

But on the other hand, when combined with the yen's shifts against other currencies, the total effect was just 5 billion yen ($44 million), which was the smallest exchange-rate-related gain for Toyota in 13 quarters. That shrinking exchange-rate advantage was a key contributor to the fact that Toyota's operating profit declined 5.3% last quarter, its first year-over-year decline in nearly two years. 

The bad news for Toyota shareholders is that it's not likely to get any better, and it might, in fact, get worse.

Sales aren't giving Toyota a boost right now, either
The challenge for Toyota is compounded by the fact that it isn't getting a whole lot of help from sales right now either. Its global vehicle sales fell by about 2.2% last quarter, and they were down about 3.7% through the first nine months of the company's fiscal 2016. 

At least in the U.S., the trend has continued into this quarter: Toyota's U.S. sales fell 4.7% in January, as its SUV sales failed to offset a big decline in sales of its mainstay sedans. More worrisome, its margin-eroding discounts have been rising. 

Toyota's forecast for the quarter that will end on March 31 (the fourth quarter of its 2016 fiscal year) assumes an exchange rate of 115 yen to the dollar, and 120 yen to the dollar for the full fiscal year. If the yen drops much further, Toyota may miss its own expectations. Stay tuned. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$157.11 (0.37%) $0.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.