uploads/2017/05/6-8.png

Could Toyota’s Dismal 2018 Guidance Hurt Investors’ Sentiments?

By

Updated

Toyota’s fiscal 2017

In the fiscal year ended March 2017, Toyota Motor’s (TM) performance worsened almost on every front compared to the previous fiscal year. Recent strength in the Japanese yen (or JPY), Toyota’s reporting currency, was one of the key factors that hurt its financial figures. Now, let’s take a look at what Toyota’s management has forecasted for the company’s fiscal 2018.

Article continues below advertisement

Weak 2018 guidance

Management expects Toyota’s 2018 consolidated vehicle sales to be slightly lower at 8.90 million units as compared to 8.97 million units sold in the last fiscal year.

Similarly, Toyota expects its fiscal 2018 revenues to witness a minor decline to 27.5 trillion yen, down about 0.4% YoY (year-over-year). A continued unfavorable change in the foreign exchange rate could be the primary reason for this stagnation in the company’s revenues.

Toyota calculated this guidance at an average exchange rate of 105 yen per US dollar and 115 yen per euro in fiscal 2017 compared to 108 yen per US dollar and 119 yen per euro in the last fiscal year.

Toyota expects this unfavorable currency movement to negatively affect its profitability in 2018. The company expects its 2018 operating margin to contract to 5.8% from the current 7.2%.

Moreover, TM has guided its net profit margins to be at 5.5% in fiscal 2018, much lower than the 6.6% in the last fiscal year.

Why should investors care?

In the auto industry, profitability is one of the key factors while analyzing a company’s future growth prospects. Therefore, investors should watch any factor that could negatively affect an automaker’s margins 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 other key markets. This may negatively affect investors’ sentiments.

Continue to the next part to find out what factors may drive Toyota’s valuation multiples in the coming quarters.

Advertisement

More From Market Realist