What Else Must this Company Do?

11/08/2013 11:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Despite the fact that this car maker is producing impressive results, apparently they are not impressive enough for some, which is why MoneyShow's Jim Jubak, also of Jubak's Picks has some suggestions regarding what should happen next.

Was it just a weak yen?

On November 7, Toyota Motor (TM) announced a 70% jump in profits for September quarter. For the period, sales climbed 16%.

The company's New York traded ADRs (American Depositary Receipts) were down 2.6% as of the close. Partly that's because, as great as Toyota's results were, Wall Street had expected even more. Operating profit of 592 billion yen, a 74% increase year over year, was still below the consensus forecast for 617 billion yen. Partly the decline is on disappointment that the company set its interim dividend payout at just 65 yen, when much of Wall Street was expecting 90 yen, or so, a share. And partly the drop is just the normal sell on the news. Toyota ADRs were up 38.6% for the year to date and 59% of the last 12 months as of the close on November 6. (Toyota is a member of my Jubak's Picks portfolio.)

I can imagine traders saying, “Record profits, heh? What can Toyota do to top this? Better sell.”

I disagree with the conclusion. But I think the question is an important one. Here's what I think is next.

First, more sales and profits from a weak yen. Toyota raised its guidance for the full fiscal year than ends in March 2014 to a net profit of 1.67 trillion yen. That's up 13% from the company's previous forecast of 1.48 trillion yen. It's important to note that the company is being very conservative on its forecast for the yen at an exchange rate of 95 to the dollar for the second half of the fiscal year, and 97 yen to the dollar for the full year. If the yen is weaker than that—and it closed at 98.07 to the dollar yesterday—Toyota's sales and profits are likely to be higher. (In the quarter, Toyota exported about 48% of its production from Japan.) Morningstar calculates that a weaker yen added about 280 billion yen to operating profit in the quarter.

Second, the company's efforts at cutting costs by using standardized parts across a wider variety of models are delivering solid results. In the quarter, cost cutting added 70 billion yen to operating profit, according to Morningstar.

Third, despite raising guidance, it looks like Toyota is low-balling its sales estimates. The company is still forecasting a drop of about 12% in sales in the second half of the fiscal year. That seems pessimistic in light of the company's 12% increase in sales in October.

The stock trades at just 10.4 times projected fiscal 2014 earnings per share. As of November 7, 2013, I'm leaving my target price for the ADRs at $160 by June 2014.

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 manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Toyota Motor as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

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