Buy Toyota to profit from a falling yen
You certainly can’t accuse Toyota Motor (TM), the world’s largest carmaker, of letting the falling yen go to its head.
Yes, the company raised its earnings forecast to a five-year high on February 5. Toyota told analysts that it expects earnings of 860 billion yen ($9.3 billion) for the fiscal year that ends on March 10. And much of that profit comes from a swing from a strong (78 yen to the dollar in October 2012) to a weak yen (93.54 yen to the dollar on February 5, 2013.) The strong yen cost Japan’s automakers 3.68 trillion yen in the five years ended in March 2012, Credit Suisse estimates. The automakers will recoup about 1 trillion yen in the two fiscal years that end in March 2013 and 2014, Credit Suisse calculates.
What’s interesting to me is how extremely conservative Toyota was about the yen/dollar exchange rate in its earnings forecast. The company did indeed revise its forecast for the yen-dollar exchange rate from 79 yen to the dollar to… get ready…81. Considering that the yen traded at 93.54 to the dollar today, I’d say Toyota’s new forecast for company profit is already in the money. Toyota also forecast that the yen would fall to 105 to the euro. It’s currently at 126 to the euro.
A cheaper yen will help Toyota sell more cars against Detroit, and Korean and European makers such as BMW. Toyota’s share of the U.S. market has climbed for the last two months to the highest level since May 2012. In 2012 Toyota outsold both General Motors (GM) and Volkswagen and regained the global industry sales crown it lost to General Motors in 2011. Toyota expects to deliver 8.85 million units in the fiscal year that ends in March—a forecast that it raised by 100,000 units yesterday. For fiscal 2013 the company projects that it will deliver 9.91 million vehicles.
I think Toyota is one of the bet ways to play the yen, combining as it does a stock with sound fundamentals and a company with huge yen exposure through its exports. I calculate a target price of $120 for the shares. I’m adding Toyota to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ with this post.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Toyota as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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I’m confused by your reference to the yen/euro ratios. If, as you state (end of third paragraph), the exchange rate goes from 126 yen to the euro to 105, wouldn’t that represent a strengthening of the yen? What am I missing?
Wouldn’t the decline in the value of the yen to the dollar cancel out some or most of any gain in the shares in yen when translated to dollars for the ADRs?
One thing to keep in mind with the likes of Toyota, Nissan etc is that as the yen weakens, all of their manufacturing inputs (iron ore, coal, oil etc) go up in price neutralizing a significant portion of the gains, how much they are neutralized and on what time frame depends on how large their stockpiles are.