Toyota tops Q2 2018 profit view on rising demand for RAV4

Due to weaker Yen and successful implementation of a new manufacturing process that saved ¥100 billion ($879 million) in the past six months, Japan’s largest automaker Toyota Motor Corporation (NYSE: TM) reported fiscal 2018 second-quarter earnings that beat analyst estimates.

The company also raised its fiscal 2018 earnings outlook, while announcing a ¥250 billion share repurchase program.

Still, the stock has not moved up so far. We anticipate an uptrend to begin in the week ahead due to the facts presented below.

Total revenues in Q2 2018 grew 10% to ¥7.143 trillion, from ¥6.481 trillion in Q2 2017. The quarterly revenues grew despite a decline in the North American sales.

Toyota Global

Net income attributable to Toyota in the second-quarter was ¥458.27 billion, an increase from ¥393.708 billion in the year-ago period. Operating profit increased to ¥522.247 billion in the quarter ended September 2017, from ¥474.635 billion in July-September 2016. The Thomson Reuters survey indicated that analysts’ were expecting a net profit of ¥436.30 billion, operating profit of ¥515.3 billion, and revenues of ¥6.92 trillion.

For the first times since 2009, the company captured 15% of the US market and pushed Ford behind it. Notably, North America accounts for 40% of operating profit of Toyota, if exports from Japan are included.

A shift in the US consumer preference towards SUVs is working in favor of Toyota as it continues to see robust demand for RAV4 utility vehicle. The company is increasing the production of RAV4 vehicle, among other pickup trucks. Toyota is also making additional investments in its Mexican plant to rake up production of Tacoma pickup trucks. Large vehicles make up 60% of Toyota’s sale in America. Further, in collaboration with Mazda Motor Corp, Toyota is setting up a plant in the US, with an investment of $1.6 billion.

Even though the US automobile market has rebounded in the past two months, mainly due to the hurricane induced demand, sales continue to remain weak. That keeps the stock bearish.

However, Toyota has clarified that its worldwide sales volume grew 2.3% y-o-y to 5.22 million in the six months ended September 30. If we include the figures of Daihatsu and Hino subsidiaries, then the automaker’s global sales growth was 2.9% in the first half. Thus, cost-cutting measures and focus on fleet sales have encouraged the company to issue an optimistic fiscal 2018 outlook.

Looking forward, Toyota lifted its global vehicle sales outlook to about 8.95 million vehicles. The company also announced a share repurchase program for ¥250 billion. It would be the last of the series of share buybacks done during the past few years. Thus, strong earnings, an increase in demand for RAV4 vehicle, and positive sales outlook for FY18 turns Toyota bullish.

The stock of Toyota is trading above its 50-day moving average. Further, the ultimate oscillator is indicating a trend reversal. That is confirmed by the stochastic oscillator which is rising towards the bullish zone. Thus, we can expect a rally in the stock soon.

By investing in a call option, we are hoping to gain from the analysis presented above. The option should remain active until December 5, while the entry will be made when the stock trades at about $125 in the NYSE.

---