Toyota Aims For 3% Sales Growth - Analyst Blog

Toyota Motor Corp. (TM) has targeted global sales growth of 3% to 8.61 million vehicles in 2011 compared with 8.37 million vehicles in 2010. The sales projection included vehicles to be sold by its subsidiaries – Daihatsu Motor Co. and Hino Motors Ltd.

The automaker is banking on burgeoning demand in the Asian markets to lift its sales. It expects overseas sales to grow by 8%, offsetting the 12% slump in domestic sales stemming from termination of government incentive program in September this year.

Excluding sales from subsidiaries, Toyota projected its domestic sales to dip 17%, which is higher than 10% fall in the overall Japanese market forecasted by the Automobile Manufacturers Association of Japan.

However, the automaker anticipates Toyota-only sales to grow by 8% in China to 900,000 vehicles, 11% to 2.1 million vehicles in other Asian markets excluding Japan, 9% to 1.9 million vehicles in the U.S., 7% to 860,000 vehicles in Europe and 6% to 1.3 million vehicles in the Middle East, Latin America and other overseas markets.

In order to support the growing sales, the automaker plans to enhance its production level by 2% to 8.7 million units in 2011. It will expand its overseas output by 6% to 4.8 million units and contract its domestic production by 4% to 3.9 million units.

Toyota is not the only automaker to depend on the Asian market to lift its sales. Ford Motor Co. (F) pursues a major expansion plan in the emerging markets in order to tap the growing market potential, especially those in Asia. The automaker anticipates 70% of its sales growth to come from Asia Pacific and Africa region in the next 10 years, mostly from China and India.

Toyota showed a fivefold increase in profit to ¥115.5 billion ($1.34 billion) or ¥31.47 per share (37 cents) in the second quarter of its fiscal 2011 from ¥22.19 billion ($258.26 million) or ¥6.96 per share (8 cents) in the same quarter of previous fiscal year. The profit was boosted by marketing strategy as well as cost reduction measures incorporated by the company during the quarter.

Despite the optimistic sales forecast and improved quarterly results, we remain concerned about the company given the backlash from safety recalls and appreciation of yen against the dollar.

Since September last year, Toyota has recalled about 11 million vehicles globally in greater than 15 recalls, more than any other automaker. The recalls were related to problems associated with faulty accelerator gas pedals, slipping floor mats and defective braking systems.

Recently, The Transportation Department of U.S.has informed that Toyota will pay $32.4 million in fines related to two separate investigations leading to late recall of millions of defective vehicles on top of the highest-ever fine of $16.4 million paid earlier this year related to the same issue.

In addition, strengthening yen against dollar could adversely impact the company's profit. Presently, the Japanese currency is trading at near a 15-year high against the dollar.

Due to these factors, Toyota retains a Zacks #3 Rank on its stock, which translates to a 'Hold' recommendation for the short term (1–3 months). In line with this, we also reiterate our 'Neutral' recommendation on the stock for the long term (more than 6 months).