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The car megafirm based its strong estimates on very conservative currency calculations, meaning the company's full profit potential may not yet be baked in, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

You certainly can’t accuse Toyota Motor (TM), the world’s largest carmaker, of letting the falling yen go to its head.

True, the company raised its earnings forecast to a five-year high on February 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 yen (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 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, Credit Suisse calculates.

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 today, 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, as well as Korean and European makers such as BMW. Toyota’s share of the US 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 GM in 2011. Toyota expects to deliver 8.85 million units in the fiscal year that ends in March—a forecast it raised by 100,000 units yesterday. For fiscal 2013, the company projects that it will deliver 9.91 million vehicles.

I think Toyota is one of the bet 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. 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 September, see the fund’s portfolio here.

Tickers Mentioned: TM, GM

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