Facing a Hill, Nissan Shifts Gears

The carmaker's disappointing quarterly profits may be only a temporary setback for Carlos Ghosn. Investors have yet to weigh in

Carlos Ghosn's ability to meet—and regularly beat—tough targets at Nissan (NSANY) has been a cornerstone of the Japanese automaker's success under the Brazilian native's leadership. It has also helped Nissan deliver the kind of margins and shareholder returns Detroit can only dream about.

Yet, following today's worse-than-expected results for the quarter ending Dec. 31 and a full-year profit revision, investors could be forgiven for wondering if the charismatic CEO's halo is slipping a little.

For sure, Nissan's third-quarter numbers (the company's year ends in March) aren't great. Despite the introduction of several new models, quarterly operating profits fell by 16.6%, to $1.58 billion, compared to a year earlier. Unit sales, meanwhile, slipped 3%, to 795,000 vehicles.

"Against an environment of high raw material and energy prices, no pricing power, and continuing weakness in mature markets, our industry faced many headwinds," said a statement from Ghosn, who joined Nissan in 1999. "For the first time since 1999 risks outweighed opportunities."

Not Time for Optimism

Speaking in Tokyo, Nissan Corporate Vice-President Joji Tagawa added that tough conditions in the U.S. market, where Nissan earns about 60% of its operating profits, had been a big factor. Tagawa said passenger car sales, aided by new models such as the Versa compact and Sentra and Altima sedans, had risen by 17.5% in the quarter, but truck sales had fallen 8%.

And while January wasn't too bad—Nissan sales were up 8.9%, compared with a 19% drop at Ford (F)—Tagawa adds that the U.S. market, as a whole, is not "one which you can be optimistic" about and that Nissan's recovery from a drought of new vehicles is taking longer than hoped (see BusinessWeek.com, 6/1/06, "Potholes Ahead").

"The fourth quarter recovery will be slower than our initial assumption," he says. That will make it difficult for Nissan to meet its aim and boost U.S. sales by 10% or more during the six months ending March, 2007, and post global sales for the fiscal year of 3.73 million units.

Compared to What?

It's Nissan's decision to revise its profit forecast downward that will have most resonance among investors. For the year ending March, 2007, Nissan cut both operating profit and net profit targets by 12%, to $6.67 billion and $3.96 billion, respectively.

While not entirely unexpected, that means Nissan's full-year profit will almost certainly fall for the first time in seven years. What's more, the figures would have been worse if it wasn't for a weaker yen benefiting Japanese automakers (see BusinessWeek.com, 2/1/07, "Who's Cashing in on the Weak Yen?").

Still, it's hardly all doom and gloom at Nissan. For one thing, the disappointing quarter isn't a huge surprise to analysts, many of whom have long thought Nissan would struggle to reach its targets for the current financial year, but still rate Nissan a "buy". "We have a positive view on Nissan's prospects over the next year," wrote Kurt Sanger, an analyst at Macquarie Securities in Tokyo, in a research note on Jan. 19.

Shift to Emerging Markets

One reason is that Nissan's weak quarters are only comparatively weak. Its operating margin for the quarter ending December was still a healthy 7.8%, and its new models, such as the Altima and Versa, have been well received.

In Mexico, for instance, where the Versa is built, the company added a third shift in January to meet demand. The company is also maintaining its target to sell 4.2 million vehicles during fiscal 2008, a 20% return on invested capital, and a top-level operating profit margin. "It goes without saying that for fiscal year 2007, we will continue to be guided by the commitments taken under Nissan Value-Up," Ghosn added.

Analysts also reckon that Nissan and alliance partner Renault, which Ghosn also heads, are tooling up to make gains in some of the world's fastest growing markets, particularly India. "In 2009 and 2010, Renault-Nissan will be shifting a gear, especially in emerging markets," says Hirofumi Yokoi, an analyst at CSM Worldwide in Tokyo.

Nissan and Renault's alliance could also overtake Ford this year as the world's No. 3 automaker behind GM (GM) and Toyota (TM) (see BusinessWeek.com, 1/31/07, "Putting Ford in the Rearview Mirror").

Today's results came after the Tokyo market closed. When it opens again on Monday it will be interesting to see how Nissan's stock fares. After all, investors aren't used to Ghosn or Nissan missing targets.

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