Thailand Floods and an Embarrassing Recall Cripple Toyota (TM)

Toyota Motors (TM: Charts, News), the largest automaker in the world, followed Honda (HMC: Charts, News) last week by announcing that its supply chain had been severely damaged by the ongoing floods in Thailand, and that it would withdraw its prior financial forecast due to an excess of uncertainties.

Lingering damage from the March earthquake and the strong yen have also exacerbated the company's misfortunes. For the quarter, Toyota announced that its profit had dropped 19% to 80.4 billion yen, or $1 billion, and that its revenue had slipped 4.8% to 4.6 trillion yen, or $57 billion from the prior year quarter. Although both earnings and revenue declined year-on-year, it is a sequential improvement over the company's last quarter, which is a small consolation for investors. Meanwhile, a recall of over half a million vehicles worldwide over a steering problem tarnished the company's image once more, leading investors to wonder if Toyota was destined to cede its leading position to General Motors (GM: Charts, News), which has capitalized on Japanese weakness by expanding aggressively in emerging markets. Daily Chart
Between April and September, the three major Japanese automakers - Toyota, Honda and Nissan - posted a 20% decrease in production due to the combined impact of the March earthquake and the current floods in Thailand. The supply chain for these companies was first crippled, and now broken, by these natural disasters. Three of its Thailand factories have been shut down since early October, causing a shortage of parts that has weighed heavily on vehicle production, and is forecast to cause a loss of 150,000 units by mid-November. Production capabilities in Japan are expected to be lowered until at least November 18. Meanwhile, a rising yen - seen as a safe haven from the euro and the dollar - has severely crimped the company's overseas pricing power. Despite a government promise for currency intervention, the yen remains at a post-World War II high against the greenback. A strong yen increases the cost of exports and increases its prices overseas, placing the company at a severe disadvantage against its foreign rivals. Japan's domestic market is shrinking as well. Out of the forecast goal of manufacturing three million cars yearly in Japan, fewer than half are sold to the weakening domestic market, increasing the company's dependence on a weak yen. In other markets, Toyota has attempted to raise costs to preserve margins - a relatively ineffective strategy criticized by investors and analysts alike. "Recent foreign currency levels threaten to undermine Japan's standing as an exporter nation," Executive vice president Satoshi Ozawa stated. Ozawa also reaffirmed that the company will keep the bulk of its manufacturing operations in Japan, despite investor requests to outsource operations overseas further to more emerging markets. Another recall, however, stands to undermine Toyota's efforts. Last week, the company announced that it was recalling 550,000 vehicles globally due to a steering problem. The defect affects V-6 Toyota and Lexus branded vehicles - 447,000 in North America, 38,000 in Japan, 25,000 in Australia and New Zealand, 14,000 in Europe, 10,000 in the Middle east and 14,000 in the rest of Asia. This current recall, related to issues dating back to 2007, is the latest in the string of recalls that has now affected over 14 million vehicles. Models affected include the 2004-2005 Camry, the 2004 Avalon, the 2006 Highlander hybrid, the 2004-2005 ES330 and RX330 and the 2006 RX400h. The recall is expected to officially start in January, with U.S dealerships notifying unaware customers of the vehicle problems. During the depths of the 2008-2009 global financial crisis, many analysts in America supported placing Toyota in the Dow 30. That seems like a lifetime ago for the stock, which has gone nowhere but down over the past year, dropping off a 52-week high of $93.90. Even at current prices, it still trades with a trailing P/E of 36, although its 5-year PEG ratio of 1 suggests that the stock can bounce back quickly if the macro outlook improves enough to give it sufficient time to recover from the double blow of the disasters in Japan and Thailand. Other News About TM Toyota aims to restore Japan output early 2012 Toyota might return to normal by 2012, if it can avoid any more disasters and recalls. Toyota recalls 420,000 vehicles in U.S., 550,000 worldwide Another black eye for Toyota's quality control unit as over half a million vehicles are recalled. Other Stocks in the News GM: Solid Earnings But Europe Warning Gives Stock Flat Tire GM beats estimates, but the stock slides on worries about Europe. 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Published on Nov 18, 2011
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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