Toyota sees hope in disastrous quarter

Profit drops 77%, but the automaker says it might return to normal production earlier than expected.

By Kim Peterson May 11, 2011 1:01PM
There was no question that last quarter would be devastating to Toyota Motor (TM), whose production took a major hit after the March 11 earthquake in Japan. Today Toyota showed just how badly it suffered.

Profit fell 77%, more than expected. Toyota declined to give a full-year forecast for earnings or production. The rising value of the Japanese yen is also taking a bite out of profits.

The unhappy bottom line is that Toyota will likely lose its status as the world's largest automaker to General Motors (GM) and fall into third place behind Volkswagen. In the first quarter, Toyota sold 1.79 million vehicles, behind the 2.2 million sold by GM and the 1.99 million by Volkswagen.

Post continues after this video about Toyota's earnings report:
"With gas prices as high as they are -- almost $4 per gallon -- Toyota should be in a prime spot to win market share, but the supply simply isn't there," an Edmunds.com analyst told The New York Times. "Toyota shoppers are starting to expand their consideration to other brands."

The challenge for investors today is to look beyond the effects of the earthquake for a read on Toyota's health. After all, the earthquake occurred three weeks before the end of the quarter, which also ended Toyota's fiscal year. Yes, the yen is a killer, but Toyota is dealing with a host of other problems, including management changes and the still-reverberating impact of all those recalls in 2010.

"There's a lot going on at Toyota that keeps them less profitable than the other guys," a Deutsche Bank analyst in Tokyo told The Wall Street Journal. "They are just trying to hold the line with their domestic operations, but the yen (strength) makes that a moving target."

But Toyota's stock price has held up fairly well, and even after Wednesday's dour earnings report, shares showed a slight gain in midday trading to $81.28. Perhaps that's because Toyota had some good news amid all the bad.

The automaker said it would get back to normal production sooner than expected, starting in June worldwide. Previously, it said regular production would start recovering in Japan in July and everywhere else in August. But even still, Toyota warned that June production will still be down 30% from normal levels.

Toyota said the Japanese earthquake cut about $1.36 billion in operating income for the quarter. Net profit was only 25.4 billion yen, or $314 million, a fraction of the 112.2 billion yen a year earlier and far below the 104 billion yen expected by analysts. Sales fell 12% to 4.6 trillion yen.

Analysts were surprised by the company's operating profit for the quarter, which dropped 52% to 46.1 billion yen, or $571.5 million. Analysts had expected more than twice that amount.

But for the full year ended March 31, Toyota said its net profit rose 94% to 408.1 billion yen, or about $5.1 billion. Operating income more than tripled to 468.2 billion yen, and revenue rose 0.2% to nearly 19 trillion yen.

Toyota also showed it's struggling with another issue provoked by the strong yen. Should the company protect itself by moving more production outside of Japan? Toyota made 45% of its cars in Japan in the last year.

"How much longer should we insist on producing in Japan?" the chief financial officer, Satoshi Ozawa, asked at a press conference in Tokyo, Bloomberg reports. "I feel strongly that our efforts may have exceeded the limits of what is possible in dealing with the yen's impact."

The company can see rivals in other countries, particularly Germany and South Korea, getting a boost from weaker currencies and free-trade agreements, Bloomberg reports. The strong yen knocked about $3.6 billion from Toyota's profit for the last year -- far more damaging than the March earthquake.

"I fully understand that we can't go on with just a desire to protect manufacturing in Japan," president Akio Toyoda said.

The company made no announcements about relocating production, but it sounds like we could expect more news on that front in the coming year.

2Comments
May 12, 2011 11:31AM
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Their stock never dropped to the level it was during the brake fisaco.

Sell if you must.. But I'm staying put.

May 12, 2011 11:06AM
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Think it is just a pull back correction and going to keep on loading up on the long side!  Looking for that hole than going to buy!!!!!!!!!!!!!!!!!  Don't worry big investment institutions, your way to easy to figure out now and your slack traders and programs are why to predictable.
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