Toyota TM 0.85% and Nissan NSANY 0.52% are giving more warning signals about the road ahead than their American peers. This is misleading: The Japanese players may actually handle it better.
Nissan said it expected an operating profit of 250 billion yen, equivalent to roughly $1.9 billion, for the year through March 2023—in line with what it achieved in the last fiscal year. Analyst forecasts currently average ¥316 billion, according to FactSet, so they may come down. Thursday’s announcement came after the Tokyo close, but shares in French car maker Renault, which owns 43% of Nissan, fell about 7% in European trading.
Toyota came out with similarly bearish guidance Wednesday, triggering a selloff in its stock. Both companies talked a lot about raw-material headwinds amid rising commodity prices. This was a theme of U.S. car maker earnings, too, but with a difference: General Motors GM -3.98% and Ford F -2.03% implied in their guidance that they can offset the pain by increasing vehicle prices. Aggressive price increases don’t seem baked into forecasts for Toyota and Nissan to the same extent.
The most plausible explanation for this difference is the greater caution of the Japanese players, both toward issuing forecasts and toward charging more for their products. After some analysts have dutifully downgraded their numbers to align themselves with the companies’ outlooks, investors might want to take another look at them.
There are echoes today of 2004-2006, when Japanese players fared much better than their U.S. counterparts, says Mio Kato, who writes about Japanese car makers on research platform Smartkarma.
One is the weak yen, which has plunged in recent weeks to a 20-year low against the dollar as the Federal Reserve has ramped up expectations of interest-rate increases much faster than the Bank of Japan. This gives an advantage to Japanese industry: Car makers source parts from their home country even when they assemble them in the U.S. and Europe. They should be able to increase prices more modestly than peers while retaining their margins.
Another is high gas prices, which in the early years of the millennium pushed consumers toward smaller, more fuel-efficient models such as the Toyota Prius. Tastes now favor larger vehicles, particularly in the U.S. This seems unlikely to reverse completely, but gas-electric hybrids and smaller sport-utility vehicles—both specialties of Japan Inc.—could become more popular as the current supply crunch eases. Cheaper models in general will probably sell better as interest rates rise, in another echo of 2004.
Toyota and Nissan both have their challenges, but investors shouldn’t read too much into the low bars they have set for their new financial year. If the going is anything like as tough as their forecasts imply, it will likely be worse for Detroit.
Write to Stephen Wilmot at [email protected]
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