Toyota's Rosy but Risky Forecast

In the midst of mounting recall troubles, Toyota (TM) released earnings for its third quarter ending Dec. 31 and said it posted a profit for the period. On a consolidated basis, net revenues for the quarter were 5.3 trillion yen -- an increase of 10.2% compared with the same period last fiscal year. Operating income increased from a loss of 360.6 billion yen to a gain of 189.1 billion yen, while pre-tax income, minority interest and equity in earnings of affiliated companies totaled 224.9 billion yen. Net income increased from a loss of 164.7 billion yen to a plus 153.2 billion yen. The net profit translates into about $1.7 billion U.S. dollars. Several media reports said the numbers topped analyst forecasts.Toyota also increased its forecasts for revenue and net income for its fiscal year ending March 31. The world No.1 car company said revenue for the year would be 18.5 trillion yen, and profits would rise to 80 billion yen. This includes costs that are equivalent to $2 billion for its 8 million recalls and expected lost sales due to the problems.

The New York Times reports that Toyota admitted it had problems with brakes on its Prius. The potential costs of repairs and lost sales due to the Prius issue are apparently not included in Toyota's forecasts.

The obvious question about Toyota's projections is whether they are based on a view of the company's future that's much too optimistic. The firm cannot even begin to guess the impact of product-liability suits and lost sales due to the remarkably severe damage that Toyota's reputation has suffered.

Sales of Toyota vehicles are dropping already, and could stay down for months. The company's U.S. sales for January were off nearly 16%, and its recall announcements came at the very end of the period. Sales could easily drop much further than that in February, and there's no reason to believe that they'ill recover quickly, as other large car companies work to pick up sales that would normally go to the Japanese firm.

Toyota's second-largest market is Japan, and its sales are rapidly expanding in China, totaling more than 700,000 last year. Sales in those regions and the big European markets could also fall and stay down for a period that's impossible to predict.

Toyota's fourth-quarter 2009 profit could be its last for a long time, no matter what the company has forecast.
Read Full Story