Company Reports

Toyota finished fiscal 2024 with excellent year-over-year profit growth despite lower unit volumes in Japan following Daihatsu’s safety scandal. We are raising our per share fair value estimates to JPY 3,300 from JPY 3,000 and to $211 from $200 on the time value of money, higher book value for the finance arm, and a weaker average yen aiding profits over our five-year explicit forecast period. Fourth-quarter operating income rose 77.5% to over JPY 1.1 trillion with operating margin up 450 basis points to 10%. A nearly 13% weaker yen against the dollar boosted profit by JPY 200 billion and overall currency benefits to profit growth were JPY 305 billion, nearly two thirds of the JPY 485.7 billion profit increase. Lower material costs and cost-reduction efforts contributed another JPY 185 billion of profit increase and more than offset JPY 100 billion of higher labor costs.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and increasing scale from the Toyota New Global Architecture, which develops vehicles using common parts, something critical for Toyota to keep pace with large automakers and Tesla. We think giving local designers more control is letting Toyota make more exciting vehicles.

Higher inventories and more discounting continue to bring consumers back to showrooms this year, with March US light-vehicle sales up by 4.6% year over year. Wards put the seasonally adjusted annualized selling rate at 15.49 million, up from 14.93 million in March 2023. The chip shortage is mainly behind the industry, so inventories are at their highest levels since early 2021, which, in turn, is bringing incentives off ultralow levels as a percentage of the average transaction price. Per Cox Automotive, incentives have recently trended at nearly 6% of ATP, about double the rate in early 2023 but still far below prepandemic levels in the low teens. We expect continued inventory growth and higher incentives, which, combined with a possible interest rate cut or cuts this year, may fuel higher demand.

Toyota reported an excellent fiscal 2024 third quarter and raised guidance. EPS of JPY 100.62 rose by 88.4% year over year and beat the LSEG consensus of JPY 81.61. We are increasing our yen and U.S. dollar fair value estimates each by over 3% to JPY 3,000 per share and $200 per share to model higher profits for fiscal 2024 and fiscal 2025. For fiscal 2024 guidance, the company increased its operating income projection by 8.9% from prior guidance to JPY 4.9 trillion. Management’s increase comes from higher volume and pricing contributions than previously expected as well as cost reductions offsetting rising materials costs and continued contribution from a weak yen against the dollar and other currencies. We think the company can beat its full-year outlook because demand should remain robust and guidance now assumes a full-year exchange rate of JPY 143/USD 1 (JPY 141 previously), which is stronger than where the yen trades in early February at around JPY 148. The strong second half of the year profits, in our view, bodes well for the full-year dividend payout to be announced later this year.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and increasing scale from the Toyota New Global Architecture, which develops vehicles using common parts, something critical for Toyota to keep pace with large automakers and Tesla. We think giving local designers more control is letting Toyota make more exciting vehicles.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and increasing scale from the Toyota New Global Architecture, which develops vehicles using common parts, something critical for Toyota to keep pace with large automakers and Tesla. We think giving local designers more control is letting Toyota make more exciting vehicles.

Toyota posted excellent fiscal 2024 second-quarter results and we are leaving our fair value estimate in place. Total revenue increased 24.0% year over year and operating income rose by 2.6 times while operating margin increased 650 basis points to 12.6%. A weaker yen at JPY145/dollar versus JPY 138/dollar in the prior year's quarter contributed over half the JPY 145 billion currency benefit to earnings, while massive improvements in volume, mix, and other marketing efforts contributed JPY 690 billion of the operating income increase. Toyota is operating at record production levels as demand remains strong while it recovers from fiscal 2023 chip shortage and other supply chain problems, all of which significantly drives scale. EPS of JPY 94.51 easily beat the JPY 65.14 Refinitiv consensus.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops vehicles using common parts, something critical for Toyota to keep pace with large automakers and Tesla. We think giving local designers more control is letting Toyota make more exciting vehicles.

Toyota started fiscal 2024 with a strong recovery from the semiconductor shortage that allowed EPS to rise 80.3% year over year to JPY 96.74, which beat the JPY 61.81 Refinitiv consensus. We are raising our fair value estimates to JPY 2,500 per share from JPY 2,400 and $171 from $169 on the time value of money, higher equity income, and for the U.S. dollar fair value, a slightly stronger yen to translate our yen model to dollars. Consolidated vehicle volume rose by over 15% to help drive total company operating income up 93.7% and operating margin up 380 basis points to 10.6%. Nearly every geographic market improved, with the exception of a fiercely competitive Chinese market sending equity method income there down JPY 25.4 billion. North American operating margin rose by only 40 basis points to 3.0%, but a new Tacoma due in the third quarter and the recently launched Grand Highlander three-row crossover may help fiscal 2024 margin later.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops many vehicles using common parts, something critical for Toyota to try to keep pace with the likes of Tesla and Volkswagen. We think giving local designers more control is finally letting Toyota make more exciting vehicles.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops many vehicles using common parts, something critical for Toyota to try to keep pace with the likes of Tesla and Volkswagen. We think giving local designers more control is finally letting Toyota make more exciting vehicles.

We are not changing our fair value estimate after Toyota reported fourth-quarter and full-year fiscal 2023 results ending March 31. We will reassess all valuation inputs once we roll the model forward a year for the 20-F filing, which we expect in late June. Total company fourth-quarter revenue increased 19.4% year over year to nearly JPY 9.7 trillion, while operating income rose by 35.2% and margin by 80 basis points to 6.5%. Foreign exchange benefit was again the key profit growth driver, contributing JPY 235 billion in operating income growth including JPY 160 billion from the yen weakening against the U.S. dollar by nearly 14%. Excluding the foreign exchange translation benefit and various small items, operating income declined by JPY 80 billion as JPY 85 billion in cost reductions could not offset a JPY 435 billion raw materials cost increase plus other negative variances such as JPY 70 billion for higher research and labor costs. Materials net of cost reduction efforts for the full fiscal year took JPY 1.29 trillion from operating profit.

Toyota’s fiscal 2023 third quarter had revenue grow 25.3% year over year and operating income rise by 22% but with a 30-basis-point margin decline to 9.8%. We are leaving our yen fair value estimate intact and raising our U.S. dollar fair value estimate by 9.6% to $172. The change is mostly the net impact of modeling a stronger yen against the dollar across our five-year explicit forecast period and then translating our yen model to dollars at a stronger yen than our prior valuation. We now model the average yen to dollar exchange rate over our five-year forecast period at JPY 122.46 instead of JPY 132.74 and translate our yen fair value estimate to dollars at JPY 131.29 instead of JPY 148.19. Given the yen was recently at over 30-year lows against the dollar, further yen appreciation could occur at some point, but continued recent U.S. interest rate increases may keep the yen close to early February levels for fiscal fourth quarter. Management kept fiscal 2023 guidance unchanged from Nov. 1 and expects the average yen to dollar rate for fiscal 2023 to be JPY 134 versus JPY 135.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops many vehicles using common parts, something critical for Toyota to keep pace with the likes of Volkswagen. A big change on the parts side is that the company uses more parts on a global standard as opposed to Toyota-specific standards. The long-term goal is for vehicles that share a platform to have 70%-80% common parts. We think giving local designers more control is finally letting Toyota make more exciting vehicles. Toyota is thinking about the future with its Monet autonomous vehicle services joint venture with SoftBank and other Japanese automakers, such as Honda, its battery joint venture with Panasonic, and Woven City, a laboratory city of the future in Japan run on hydrogen fuel cells. Toyota is working on solid state batteries and has an JPY 8 trillion electrified vehicle plan (includes hybrids) for 2022-30. The battery joint venture with Panasonic, as well as Toyota mostly on its own, is spending up to JPY 730 billion yen to build 40 GWh capacity in Japan and North Carolina opening between 2024 and 2026.

Toyota announced on Jan. 26 that president and CEO Akio Toyoda, 66, will step down from those roles on April 1 and become chairman. He’s been leading Toyota since 2009. Lexus president, Koji Sato, 53, will become president and CEO of Toyota and retain his title of operating officer. Toyoda in recent times has been asked about his succession plans, and he is stepping down at about the same age as prior CEOs, so the move isn’t a total shock. We will miss him in the role because we’ve always liked his passion for cars and for making Toyota vehicles much more interesting and exciting to look at, even for traditionally bland midsize sedans such as the Camry. Sato, however, also deserves credit for this change as he led the development of the Lexus LC coupe and is currently president of Toyota’s GAZOO Racing. Sato is an engineer by training and joined Toyota in 1992. He became Lexus chief engineer in 2016, and chief branding officer of the whole company in 2022. We see no reason to change our fair value estimate, and we expect no major changes in strategy from Sato, at least right away. Toyoda said that Sato can best move Toyota to change into a mobility company from a carmaker, partially because of his younger age.

Toyota’s fiscal 2023 second quarter saw large competing headwinds and tailwinds with the headwinds winning and sending operating margin down 380 basis points year over year to 6.1%. We are leaving our yen fair value estimate in place, but a much weaker yen against the U.S. dollar since our last update causes the translation of our yen model to dollars to yield a fair value estimate of $157, down from $171. We now translate our yen fair value estimate at JPY 148.19 to the dollar compared with JPY 136.10 previously.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops many vehicles using common parts, something critical for Toyota to keep pace with the likes of Volkswagen. A big change on the parts side is that the company uses more parts on a global standard as opposed to Toyota-specific standards. The long-term goal is for vehicles that share a platform to have 70%-80% common parts. We think giving local designers more control is finally letting Toyota make more exciting vehicles. Toyota is thinking about the future with its Monet autonomous vehicle services joint venture with SoftBank and other Japanese automakers, such as Honda, its battery joint venture with Panasonic, and Woven City, a laboratory city of the future in Japan run on hydrogen fuel cells. Toyota is working on solid state batteries and has an JPY 8 trillion electrified vehicle plan (includes hybrids) for 2022-30. The battery joint venture with Panasonic, as well as Toyota mostly on its own, is spending up to JPY 730 billion yen to build 40 GWh capacity in Japan and North Carolina opening between 2024 and 2026.

Toyota’s fiscal 2023 first quarter suffered from supply chain shortages and inflated materials costs, but we see no reason to change our fair value estimate. Operating income fell 42% year over year and operating margin declined 580 basis points to 6.8% despite a JPY 195 billion foreign-exchange tailwind that was mostly from the yen weakening by 18.2% versus the dollar. A JPY 245 billion headwind from volume and mix plus JPY 315 billion from what Toyota called “soaring materials prices” were the main negative profit variances. Management also increased its full-year expected headwind from materials prices to JPY 1.7 trillion from JPY 1.45 trillion and remains committed to absorbing all of its Tier 1 suppliers’ cost pressures in this area. We’ve heard some skepticism from our supplier coverage on this promise, but we like that Toyota is offering to help and says it is giving suppliers a rolling three-month production schedule plan every month. We think this visibility is hard for even Toyota to predict, but suppliers are struggling with constant last-minute production stoppages, so any clarity helps the supply chain optimize its capacity to help Toyota maximize output.

Toyota's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops many vehicles using common parts, something critical for Toyota to keep pace with the likes of Volkswagen. A big change on the parts side is that the company uses more parts on a global standard as opposed to Toyota-specific standards. The long-term goal is for vehicles that share a platform to have 70%-80% common parts. We think giving local designers more control is finally letting Toyota make more exciting vehicles. Toyota is thinking about the future with its Monet autonomous vehicle services joint venture with SoftBank and other Japanese automakers, such as Honda, its battery joint venture with Panasonic, and Woven City, a laboratory city of the future in Japan run on hydrogen fuel cells. Toyota is working on solid state batteries and has an JPY 8 trillion electrified vehicle plan (includes hybrids) for 2022-30.

Toyota reported fiscal 2022 fourth-quarter results that like other automakers we cover showed major headwinds for materials costs. The yen has weakened against the dollar by about 14% since our last model update which creates favorable profit forecasts all else constant but also causes a significant currency translation headwind for our U.S. dollar fair value estimate because our model is in yen. We are lowering our dollar fair value estimate for the ADS shares by 8.5% to $162, but we are raising our Tokyo exchange share fair value estimate by JPY 100 to JPY 2,100.