Why Toyota is a smart yen play

The stock has sound fundamentals and the company has huge exposure to the currency through its exports.

By Jim J. Jubak Feb 6, 2013 10:47AM
Image: Car shopping ( Image Source/Corbis)You certainly can't accuse Toyota Motor (TM), the world's largest carmaker, of letting the falling yen go to its head.

Yes, the company raised its earnings forecast to a five-year high on Feb. 5. Toyota told analysts that it expects earnings of 860 billion yen ($9.3 billion) for the fiscal year that ends on March 10. And much of that profit comes from a swing from a strong (78 yen to the dollar in October 2012) to a weak yen (93.54 yen to the dollar on February 5, 2013.)

The strong yen cost Japan's automakers 3.68 trillion yen in the five years ended in March 2012, Credit Suisse estimates. The automakers will recoup about 1 trillion yen in the two fiscal years that end in March 2013 and 2014.

What's interesting to me is how extremely conservative Toyota was about the yen-dollar exchange rate in its earnings forecast. The company did indeed revise its forecast for the yen-dollar exchange rate from 79 yen to the dollar to . . . get ready . . . 81. Considering that the yen traded at 93.54 to the dollar Tuesday, I'd say Toyota's new forecast for company profit is already in the money. Toyota also forecast that the yen would fall to 105 to the euro. It's currently at 126 to the euro.

A cheaper yen will help Toyota sell more cars against Detroit, and Korean and European makers such as BMW. Toyota's share of the U.S. market has climbed for the last two months to the highest level since May 2012. In 2012, Toyota outsold both General Motors (GM) and Volkswagen and regained the global industry sales crown it lost to General Motors in 2011. Toyota expects to deliver 8.85 million units in the fiscal year that ends in March -- a forecast that it raised by 100,000 units Monday. For fiscal 2013, the company projects that it will deliver 9.91 million vehicles.

I think Toyota is one of the best ways to play the yen, combining as it does a stock with sound fundamentals and a company with huge yen exposure through its exports. I calculate a target price of $120 for the shares. I'm adding Toyota to my Jubak's Picks portfolio with this post.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Toyota as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
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