Hybrids Will Drive Toyota’s Q1 Earnings

Toyota Motor Corp (NYSE:TM) stock has gained about 6% this year. In comparison, U.S. rival GM (NYSE:GM) stock has gained about 22% over the same period. Toyota is expected to publish its Q1 FY’25 earnings in early August, reporting on a quarter that is likely to see the company’s hybrid vehicle sales continue to trend higher.  We expect revenue for the quarter to come in at about $72 billion, slightly ahead of consensus estimates, while earnings are likely at about $5.70 per American Depository Share.  So what are some of the trends that are likely to drive Toyota’s results for the quarter?

Toyota’s Q4 FY’24 results were also better than expected, with operating profit jumping 78% for the quarter. The gains were driven in part by a weaker yen, which made Toyota’s products more competitive overseas. Separately, demand growth for electric vehicles has been slowing as issues including high prices, concerns about range, and a lack of charging infrastructure have been impacting demand growth. Now, customers are increasingly opting for hybrid models, which offer higher economy compared to standard gasoline vehicles, without the range-related worries that come with EVs. This is providing advantageous for Toyota, which has been a laggard of sorts in the EV market, but remains a market leader in the hybrid space.  For instance, Toyota’s electrified vehicle sales (which consist primarily of hybrids) rose to 3.8 million units over the fiscal year ended March 31, 2024, a 35% increase compared to last year. These vehicles now account for 37.4% of Toyota’s overall sales. We could see similar trends over Q1 FY’25 as well.

That being said, things could be more mixed on the profitability front.  For the full year FY’25, which began in April, Toyota is projecting that profits could drop by 28% to 3.570 trillion yen (about $23 billion) on account of higher material prices and labor costs. Research and development expenses are also expected to rise as the company looks to invest in areas such as artificial intelligence and automotive software.

Toyota stock has risen by 26% since early 2021. However, the increase in TM stock has been far from consistent. Returns for the stock were 20% in 2021, -26% in 2022, and 34% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The near-term outlook for Toyota appears mixed with growth expected to cool. However, Toyota stock trades at 9x forward earnings, which we believe is a reasonable valuation, given the company’s edge with hybrid vehicles and its thicker margins versus other mass market manufacturers. We value Toyota stock at about $248 per share, about 25% ahead of the current market price. See our analysis of Toyota Valuation for more details on what’s driving our valuation for Toyota. Also, see our analysis of Toyota Revenue for more details on Toyota’s key revenue streams.

[1] Returns as of 7/25/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates