Autos

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Toyota just can't catch a break.

Annual sales volumes in China broke through the 1 million unit mark in December and rose 33 percent from a year earlier in the March quarter, the best performance since 2010. In Japan, the automaker has snapped an 18-month run of weak sales in the past two quarters, with volumes rising 9.9 percent from a year earlier in the three months to March 31.

In the U.S., April sales beat estimates, despite a decline in its Lexus luxury division. Going into Wednesday's annual results, not one of the 29 analysts tracked by Bloomberg had a sell rating on the stock, and 19 rated it a buy.

Signs of Spring?
Toyota's trailing 12-month vehicle sales by major market, percentage change on year
Source: Bloomberg Intelligence

All that sounds pretty healthy until you look at the stock market. Toyota's share price slid to a three-year low of 5,278 yen last month , making it the worst performer in the Bloomberg World Auto Manufacturers Index over the past six months, after Mazda and Changan Automobile. Relative to blended forward 12-month earnings estimates, Toyota's share price over the past 30 days has been bouncing around the lowest levels in data going back to 2005.

Leaders and Laggers
Best and worst performers in the Bloomberg World Auto Manufacturers Index (six-month moves*)
Source: Bloomberg
* Six months to May 10, 2016. Moves shown are for total return, in local currencies.

Sometimes, the bullish analysts have it right, and sometimes the bears are on the money. In this instance, it's looking like the latter: Fourth-quarter net income came in at 427 billion yen ($3.9 billion), about 7.7 percent below analyst estimates. Next year looks even worse. Net income for 2017 is projected to be 1.5 trillion yen, the least since 2013 and 31 percent below where analysts were seeing it.

What's going wrong?

Part of it's down to the currency. Foreign-exchange effects will pull about 935 billion yen from Toyota's operating income in the coming 12 months, according to a company presentation that assumes the yen will strengthen to 105 to the greenback, relative to about 109 at present. Toyota derives nearly four-fifths of its revenue from overseas, so a stronger Japanese currency can deliver a big hit to income.

Another factor is the product mix. Toyota's biggest market, the U.S., is also one of its weakest. All those sedans seem out of step in a country where declining fuel costs are causing sales of muscular SUVs and pickups to surge.

You Need to Pace the Pickup
Sales of Ford's best-selling pickup are running ahead of Toyota's Camry and Corolla sedans put together
Source: Bloomberg Intelligence

Ford's F-Series pickup now sells more units in the U.S. than Toyota's best-selling Camry and Corolla sedans put together. While Toyota's RAV4 contends with Honda's CR-V for the title of America's most-loved SUV, the company's fleet of vehicles as a whole is weighted toward designs that North American consumers are showing less interest in buying.

There are other issues, also. Expenses will go up by about 540 billion yen during the 2017 fiscal year, including a 300 billion yen item defined only as ``Expenses, etc'' in Toyota's presentation. They're probably not the good sort either: R&D and capital expenditures are defined elsewhere, and are expected to slow rather than accelerate. Perhaps they relate to provisions for the Takata airbags recall. In any case, Toyota would do itself a favor by being more upfront.

In a media conference after the results, President Akio Toyoda sounded more like a corporate turnaround specialist ruing past mistakes. The yen's previous weakness was described more as an anomaly that covered up underlying problems than a normal condition set to return. ``We have benefited from an exchange rate tailwind that has helped raise our earnings above the level of our true capabilities,'' he said. ``Toyota has become too big to respond speedily to severe changes in the business environment.''

Japan's largest company is still a force to be reckoned with. If you ignore the gloomier forecast for next year, Toyota currently has the healthiest profit margins among the 14 global automakers with at least $50 billion in annual sales, according to data compiled by Bloomberg.

Those tempted to short its stock should also note that its forecast dividend yield of 3.98 percent ranks among the best globally for blue chips, and runs a long way ahead of the interest Japanese investors could earn at a bank. And it'll look even better once Toyota completes a buyback of as much as 500 billion yen.

Could Do Worse
If you don't want to invest in banks, oil companies or pharmaceuticals, Toyota offers one of the best blue-chip dividend yields out there
Source: Bloomberg data
Note: We've counted all companies with at least $100 billion in annual sales as `blue chips.' Locations have been added in brackets for companies with major listings in more than one market.

Still, as Apple has shown, size can often be as much a liability as an asset when a company is approaching limits to growth. Toyota's earnings have raced ahead in recent years. Right now, it appears to be running on fumes.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Based on closing prices.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net