Toyota Motor (TM, Financial) announced a recall of 2.9 million vehicles last week, the latest move related to defective Takata airbag inflators. This recall does not involve any vehicles sold in the U.S., according to CNBC.
Earnings performance
The $162.3 billion Japanese car maker reported its third-quarter fiscal 2017 results early February – third-quarter results ranged from April to December 2016.
Toyota Motor reported 5.96% sales decline to 20.15 trillion yen ($180.87 million) and 24% profit reduction to 1.43 trillion yen –Â representing 7.1% profit margin compared to 8.8% the year prior.
In review, Toyota Motor recorded poor sales and profit growth despite recording a 2.3% increase in overall consolidated vehicle sales totaling to 6.64 million units compared to the same period last fiscal year.
According to Toyota, major factors affecting its operational profits were currency fluctuations in relation to currencies and the Japanese yen. Meanwhile, total costs and expenses for the period declined by 2.75%.
*Toyota Motor is estimated to report earnings on May 10, according to Nasdaq.
Outlook
Toyota Motor sees its full-year fiscal 2017 sales decline by 6.7% to 26.5 trillion yen and 26.5% reduction in profits to 1.7 trillion yen.
For the fiscal year ending March 31 Toyota revised its consolidated vehicle sales forecast from 8.85 million units to 8.90 million units –Â a 2.2% improvement from fiscal 2016.
Valuations
Toyota Motor ADR shares were currently cheaper than its peers. According to GuruFocus data, the Japanese car maker had trailing price-earnings (P/E) ratio of 9.9 times vs. industry median 17.8 times, price-book (P/B) value of 1.03 times vs. 1.67 times and price-sales (P/S) ratio of 0.68 times vs. industry median 0.81 times.
The car company also had a trailing dividend yield of 3.48% with a 34% payout ratio.
On forward average or fiscal 2018 expectations, Toyota Motor had P/S and P/E figures of 0.7 times and 9 times.
(Financial Results)
Total returns
Toyota Motor has performed poorly for its shareholders in the past half decade when compared to total return performance of the broader Standard & Poor's 500 index.
According to Morningstar data, Toyota Motor ADR shares returned total 7.3% losses this year compared to the index’s 6.07% positive return. In the past five years, the Japanese carmaker provided 7.11% total return vs. S&P 500’s 13.3%.
(Financial Results)
Toyota Motor
Toyota Motor was founded on Aug. 28, 1937 and is a Japanese automotive manufacturer headquartered in Toyota, Aichi, Japan.
For the nine months in fiscal 2017, Toyota had 32%, or 2.15 million, vehicle unit sales in North America, 24% in Japan, 18% in Asia, 15% in other countries and 10% in Europe.
Japan, in particular, contributed 42% or 10.8 trillion yen Toyota’s net sales having excluded any eliminations followed by North America with 30%, Asia with 14%, Europe with 7% and other countries with 6%.
During this period, Toyota Motor generated lesser sales in all countries it reported.
Historically, Toyota generated low double digits in operating margins from its Japan operations but recorded just 6.5% operating profit margin in its recent nine months of operations compared to 12.2% from the same period last year.
According to filings, the decrease in operating income in Japan was mainly due to the effects of changes in exchange rates and the increase in expenses and others. Although Toyota also delivered a similar operating margin – 5% – in its U.S. operations and citing "unfavorable impact of fluctuations in foreign currency translation rates" resulting in lower profitability in the country.
Toyota Motors reports in both geographic and business segment information. The Japanese carmaker has three business segments: automotive, financial services and all other.
(Company filings)
Automotive
Three-quarters into fiscal 2017, Toyota Motor automotive sales fell 6.1% to 18.4 trillion yen, representing 91% of total sales. The segment delivered 7.2% operating margin compared to 10.2% the year prior.
(Company filings)
Financial services
Nine months into fiscal 2017, financial services sales also declined by 6.1% to 1.35 trillion yen or 7% of total company sales excluding eliminations. The division reported 14.5% –highest among the three segments –Â compared to 18.5% last year.
All other
All other sales for the recent three-quarters also declined 3.1% and delivered operating margin of 5.4%Â –Â similar to its prior-year operations.
Sales and profits
(Morningstar data and Financial Result)
According to Morningstar, Toyota Motor had three-year sales and profit growth and margin averages of 8.8%, 33.95% and 7.73%.
(Financial Result)
Cash, debt and book value
As of December, 2.55 trillion yen in cash and cash equivalents and 19.45 trillion in short- and long-term borrowings have a debt-equity ratio of 1.12 times vs. 1.13 times the year-prior, according to Morningstar data.
No goodwill nor intangibles were identified. Toyota Motor had a book value of 17.3 trillion yen –Â small positive change from last year’s figure.
Cash flow
(Financial Result)
Nine months into fiscal 2017, Toyota reported a 29.5% reduction in cash flow from operations to 2.16 trillion yen. In addition to lower profits for the period, Toyota experienced lower provisions for doubtful accounts and credit losses and lower deferred income taxes, among others. The Japanese carmaker also had higher cash outflow from changes in operating assets and liabilities.
Capital expenditures were 2.61 trillion yen leaving Toyota Motor with 448.9 billion yen in free cash (out)flow compared to 17.3 billion yen free cash flow last year. Nonetheless, Toyota Motor committed 1.31 trillion yen to shareholders and dividends.
(2014 to 2016 Financial Results)
As observed, Toyota Motor handed out much more than its free cash flow to its shareholders in recent years.
Further, Toyota Motor allocated 491.94 billion yen in additions to finance receivables, purchases of marketable securities and security investments and changes in investments and other assets –Â net collections and proceeds.
(2014 to 2016 Financial Results)
Toyota Motor also gathered 933.4 billion yen in proceeds from short- and long-term debt issuance net payments.
Conclusion
Toyota Motor certainly exhibited slowdown in overall operations in the recent months of operations. Weakened profitability was a result of foreign currency related difficulties and added expense, according to filings.
Toyota also seemed to carry a leveraged balance sheet and weak free cash flow performance especially recently.
(Toyota Motor ADR and Price-Earnings, GuruFocus)
Two analysts offering 12-month price targets for Toyota Motor (ADR) have a median target of 119.99 –Â representing a 10.5% upside from today’s share price of $108.62 at the time of this writing.
Using conservative assumptions including a three-year earnings multiple, profit growth and earnings per share –Â including trailing figures –Â gave a value of 12.4 trillion yen or 37% downside from today’s market capitalization. This would indicate a rather depressing share price of $68 per ADR share compared to today’s share price of $108.6.
In summary, Toyota Motor is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
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