Solid June Sales Say Hang Onto Toyota Until August Earnings—But Don't Expect Much Help from the Yen

07/01/2014 5:15 pm EST


Jim Jubak

Founder and Editor,

Shares were up for this foreign car company on good news on June sales, but no thanks to the Japanese yen that appears to be strengthening, which is why MoneyShow's Jim Jubak is cutting his target price as of today, July 1.

The American Depositary Receipts for Toyota Motor (TM) were up 2.17% today to close at $122.26 on good news on June sales. Global total sales for the Toyota, Scion, and Lexus badges rose 11.9% from June 2013 on a daily selling rate basis. (June in 2013 had 26 selling days versus 24 in June 2014.) On a raw-volume basis, sales rose 3.3% from June 2013. For the first six months of 2014, sales are up 5.8% on a daily selling rate basis. (The first half of 2013 had 153 selling days versus 152 in the first half of 2014.) The Toyota division, by itself, posted an 11% increase in June on a daily selling rate basis.

Toyota's solid sales report is in the context of continued growth in US car sales as a whole. While final figures aren't in, it looks like US auto sales rose by as much as 1.2% in June, beating expectations of a 3% decline. (Toyota's US sales increased by 3% in the month.) That will take the seasonally adjusted annualized rate for US sales to between 16.2 and 16.98 million. Either figure would be the highest annual rate since 2006.

Toyota is scheduled to report quarterly earnings next on August 1 and it's safe to say that the constant currency revenue and earnings numbers will be strong. But if you'll remember, back on February 5, 2013, when I added this position to my Jubak's Picks portfolio, a forecast for a weaker yen was a big part of my logic. A weaker yen would make Toyota's cars cheaper for customers who paid in dollars, or euros, or baht and that weaker yen would also pump up the revenue and earnings lines at Toyota when revenue in non-yen currencies were translated back into yen.

But the yen has strengthened rather than weakened recently—today, July 1, it closed at 101.54 to the US dollar. If the yen stays near current levels instead of weakening to, say 107 to the dollar, then I think the upside on these ADRs is well below my current $160 target price. (The ADRs are up 23.4% since I added them to this portfolio.) The Japanese economy does seem to be picking up strength and inflation is rising in Japan—both goals of Abenomics. But the success of this policy reduces the likelihood that the Bank of Japan will intervene on a larger scale to weaken the yen. As of today, July 1, I'm cutting my target price to $145 from $160 on my forecast of a steady—as opposed to weakening—yen. I still want to hold these ADRs for the next earnings report since I think that report will be strong on the fundamentals. But I'd have to say that Toyota is going to get less of a favorable wind from the yen than I had projected.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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