Wednesday, June 5, 2013

Japanese Automakers Shift to Overdrive

From The Motley Fool, Published May 28, 2013
By Sarfaraz A. Khan
Research Assistant: G. Yousuf

The world’s leading automaker, Toyota Motor (NYSE: TM), released its earnings a few weeks ago in which it reported a significant increase in annual income as sales rose, while the weak Yen gave a boost to the bottom line. Meanwhile, Toyota’s rival and the world’s third largest automaker, Honda Motor (NYSE: HMC), also reported its annual results in which its earnings rose due to similar reasons.

The Japanese vehicle manufacturers in general, and Nissan (NASDAQOTH: NSANY.PK) in particular, have been bearing the brunt of anti-Japanese sentiments among the Chinese consumers due to the ongoing Islands dispute between the two nations. However, a strong performance in North America and currency gains have completely offset the plummeting growth in China, at least for Honda and Toyota.
The falling yen has improved the margins of the export-focused Japanese manufacturers. The effect is even more significant for Toyota as compared to Honda, as the former exports a greater percentage of its domestic production. Honda exports around 18% of its domestic production while Toyota exports an impressive 57%.
Nissan’s woes
Nissan is the third-largest Japanese vehicle manufacturer but has the greatest exposure towards the Chinese market. Therefore, the company was the hardest hit by the anti-Japanese protests. Its annual income in the last fiscal year rose just 0.3% to $3.4 billion, while it is expecting a 22.6% jump in earnings in the current year which, as you shall see later in the article, is in complete contrast to the performance of Toyota and Honda.
Nissan’s both bigger rivals are expecting at least twice as much earnings growth. I believe that there is going to be a recovery for the company in China while the new Teana model introduced earlier this year is also going to help, but nobody is expecting any significant turnaround this year. Nissan believes that its Chinese shipments will improve by 5.9% to 1.25 million units.
Toyota: Strong numbers in Asia and North America
Toyota’s revenue for the twelve months ending March 31 rose 18.7% to ¥22.06 trillion ($215 billion), while annual income climbed an astonishing 239.3% to ¥962.16 billion ($9.41 billion) as earnings per share rose to $2.97 from $0.88. The boost came primarily from two factors; strong U.S. sales and 20% depreciation of Yen in the last 3-4 months as the business posted its best figures since 2008.
Japan is Toyota’s biggest market from where it gets more than 45% of its total revenue. Here, it reported an annual revenue growth of 14.8%. However, the company’s growth last year was mainly fueled by strong performance in North America and Asia, where its sales increased more than 30%. North American sales improvement came on the back of the Avalon Sedan and the Tacoma pickup truck. Strong Asian growth has also shown that the slump in Chinese sales due to the Islands dispute could not stop Toyota’s overall growth in the continent.
Toyota Revenue by Segments
(in Million)
(in Million)
North America
I believe that throughout the current fiscal year, Toyota could continue to feel the effects of the Islands dispute in China. This is why the company has set a conservative target to sell 900,000 units in the current year in China as opposed to last year’s target of 1 million units -- which the company missed by 160,000 vehicles. It is also going to lower the prices of vehicles in region in an effort to increase its sales as it has planned to use locally sourced parts.
Honda’s recovery
Honda’s net sales rose 24.3% to ¥9.88 trillion ($96.4 billion) while net income increased an impressive 73.61% to ¥367.15 billion ($3.59 billion) from ¥211.48 trillion ($2.07 billion) in FY12. Earnings per share increased to $1.99 from $1.14 a year ago. Honda’s earnings were driven by the favorable currency impact -- similar to Toyota -- as well as the production recovery following the Japanese earthquake and the Thai floods.
Honda has reported even better numbers in Asia as compared to Toyota, with a 55% increase in revenue from the continent showing recovery following the massive Thai flooding. The North American region reported almost as much growth as its rival Honda. The business also reported better European numbers than Toyota, but the relative performance of this region in the earnings of both of these automakers has remained lackluster due to the European debt crisis.
Honda Revenue by Segments
(In Million)
(In Million)
North America
Honda: Growing in North America
A significant difference between Toyota and Honda is that the former gets nearly half of its total revenue from Japan, which is its biggest market, while for Honda, North America makes the biggest contribution to its top line. Moreover, Honda is reporting widening difference between its sales in North America and Japan as it achieved twice as much growth in North America than at its home. Honda earned $3.4 billion more in North America than in Japan in FY12; this difference has now widened by 2.7 times to $9.42 billion in FY-2013.
On the other hand, Toyota’s gap between its higher Japanese and lower North American sales has remained fairly constant over the last two years. Toyota also witnessed twice as much growth in North America than in Japan, but the company already earns more than twice as much revenue in Japan than in North America. Therefore, despite the higher percentage growth in North America, the overall difference between the two markets has remained same.

Net profit margin: Honda vs. Toyota
Honda has continuously reported greater profit margin than Toyota in the last two years and I expect this trend to continue in the coming years. This is because following the 2008 crisis, Toyota is still cautious about expanding through building new factories, even though the company has achieved its target of annual operating profit of ¥1 trillion with an annual margin of 5%. Toyota is not going to build any new factories anywhere for the next three years. On other hand, Honda is using the offensive approach and adding more production power around the world.
However, Toyota is sticking to its existing plans and is currently facing no capacity constraints. The company will continue constructing new factories in Thailand and Indonesia. Moreover, the current production capacity of 9 million units will ensure that Toyota remains ahead of its rivals in the coming years. 

Both of these companies have provided healthy projections for the current year which are significantly above Nissan’s numbers mentioned earlier. Toyota is expecting 42.4% increase in earnings and 6.5% growth in revenue this year, which indicates a rebound for the company after a long gap of five years. Honda, on the other hand, is expecting a 58% increase in its net income for the current fiscal year, driven by a 22.5% increase in net sales, which indicates that the company is expecting even greater growth than its bigger rival. 
As mentioned earlier, I am not expecting any dramatic turnaround for Nissan. Chinese problems for the three automakers will persist, but things should gradually pick up. Toyota has continued to impress with its overall performance in Asia and North America. Moreover, as Japan continues to devalue Yen, Toyota, which exports most of its domestic production, will keep going higher. Its ADR has been up an impressive 39% in the last six months.
On the other hand, Honda's ADR has increased 17.5% in the corresponding period, which puts it behind Toyota, but is slightly ahead of S&P 500, which is up 17% in the same period. But, it has an aggressive growth strategy and is more profitable than Toyota. Therefore, I am bullish on Honda for the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own personal opinion. I have no business relationship with any company whose stock is mentioned in this article