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Record profit numbers — that were in line with the market’s expectations — would not usually be met with an 8 per cent slump in a company’s share price. But there were good reasons for the reaction to Toyota Motor’s first-quarter results.
The Japanese automaker continued its streak of record earnings for the June quarter with a 17 per cent increase in profit to ¥1.3tn ($8.7bn), in results announced on Thursday.
It has several things going in its favour. It is the biggest beneficiary of a global hybrid renaissance amid slowing demand for electric vehicles, especially in the US. Hybrid electric vehicle sales there grew 50 per cent last year.
Moreover, prolonged yen weakness has not only made Toyota’s exports more competitive abroad but has boosted the value of its profits made outside of Japan when those are repatriated. Currency moves added ¥370bn ($2.5bn) in operating profit for the latest period.
Toyota estimates that it gains ¥45bn in operating profit for every ¥1 of additional weakness against the dollar. The yen weakened about 15 per cent against the US dollar between the start of this year to its nadir in July peak, moving from ¥141 to ¥161 during this time.
But there were other numbers to alarm investors. Earnings growth in the carmaker’s latest quarter was the weakest in seven quarters; group-wide sales fell 4.2 per cent to 2.6mn units. Steep declines in Toyota’s vehicle sales in key markets including Japan and China set alarm bells ringing. The automaker maintained its forecast of ¥4.3tn profit for the full year, disappointing analysts expecting an upgrade.
Reputational risks are another overhang. A string of vehicle certification cheating scandals and recalls at home have dented its image. This week, Toyota has received orders from the transport ministry to take drastic steps to prevent more misconduct.
But the bigger risk is that the earnings uplift from a weak yen may not last much longer. The central bank chief this week signalled the possibility of further interest rate hikes, sparking a yen rally and a sharp sell-off in the shares of Japanese exporters on Thursday.
Toyota shares are down 30 per cent from a March high. But even now the stock trades at nine times forward earnings, more than twice the valuation of rival Volkswagen. The task of hanging on that premium — and its record earnings streak — has just become tougher as monetary policy shifts at home.
june.yoon@ft.com
