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What Toyota’s Dismal Fiscal 2017 Guidance Could Mean for Investors

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Toyota’s fiscal 2016

In fiscal 2016 (which ended March 31, 2016), Japanese auto giant Toyota Motor Corporation (TM) managed to perform better almost on every front than it did in the previous fiscal year. Weakness in TM’s reporting currency, the Japanese yen, was one of the important factors driving this improvement. But Toyota has realized that the comfort of having a weak local currency can’t last—and this shows in the company’s weak fiscal 2017 guidance.

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Fiscal 2017 guidance

Toyota expects its fiscal 2017 revenues to decline by 6.7% to 26.5 trillion yen, or about $242.7 billion, mainly due to the unfavorable foreign exchange rate. The company calculated this guidance at an exchange rate of 105 yen per US dollar and 120 yen per euro in fiscal 2017, as compared with 120 yen per US dollar and 133 yen per euro in fiscal 2015.

Toyota expects this unfavorable currency movement to hurt its profitability in fiscal 2017. The company expects its fiscal 2017 operating margin or EBIT (earnings before interest and tax) margin to shrink to 6.4% from the current 10%. Likewise, TM has guided its net profit margins to be 5.7% in fiscal 2017—much lower than its 8.1% in fiscal 2015.

Why should investors care?

In the auto industry, profitability is one of the key factors used to analyze a company’s future growth prospects. Any factor that could negatively affect an automaker’s margins should be monitored carefully.

With the strengthening Japanese yen, Toyota is also likely to face intensified competition from its peers (VLUE) such as General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) in North America and Europe.

We should note here that Toyota’s weak guidance still doesn’t include the effects of operation suspension on vehicle assembly lines in Japan after the massive earthquake in Kumamoto in April 2016. This will likely hurt Toyota’s global revenues in fiscal 2017.

Continue to the next part for more factors that could drive Toyota’s valuation multiples going forward.

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