Scenarios: Impact of recall saga on Toyota’s 2010/11 earnings

By Chang-Ran Kim, Asia autos correspondent

TOKYO (BestGrowthStock) – Earnings at Toyota Motor Corp are under pressure as sales slide and costs mount from a recall of more than 8.5 million vehicles globally that shows little sign of abating.

Although the industry is recovering from its sharpest-ever downturn in 2009, many analysts said they no longer expect Toyota’s profits to recover as quickly as previously expected given the risk of a protracted sales hit.

Of greatest concern is the United States, Toyota’s most important market, where its brand image has suffered most and where it now faces congressional scrutiny, criminal investigations and dozens of class action lawsuits related to crashes blamed on uncontrolled acceleration.

Until two years ago the world’s most profitable carmaker, Toyota this month forecast up to a $2 billion hit to its operating profit in the financial year to March from the cost of repairs and anticipated sales loss from the negative publicity.

Excluded from that were the cost of reprogramming the software to fix a braking glitch in the Prius and other new hybrid models covering more than 400,000 vehicles globally, as well as some production cutbacks announced after it reported third-quarter results on February 4.

With the safety saga still unfolding, most analysts have not worked in a detailed breakdown of the impact into their forecasts for Toyota’s earnings for the year starting in April.

Consensus forecasts from a survey of 20 analysts put Toyota’s operating profit for 2010/11 at 580 billion yen ($6.4 billion), only a 3.3 percent drop in the mean from 30 days ago, according to Thomson Reuters I/B/E/S.

That would be up from a projected 46 billion yen profit in 2009/10.

Following are scenarios for the impact on 2010/11 earnings from some of the biggest swing factors, as seen by analysts:

DROP IN U.S. MARKET SHARE

With the models recalled for sticky accelerator pedals accounting for about 60 percent of Toyota’s sales in its biggest market, Morgan Stanley auto analyst Noriaki Hirakata is basing his assumption on a 3 percentage-point fall in Toyota’s market share to 14 percent in 2010.

Analysts’ estimates of the impact on operating profit of a 1-point decline in Toyota’s U.S. market share ranged from 80 to 100 billion yen.

In January, Toyota’s market share fell to about 14 percent from 18 percent as it halted sales toward the end of the month of recalled models. Analysts say February could see a drop to 10 percent or less with a full-month impact of the recalls.

More bullish views see a limited fall of 1 percentage point, assuming Toyota restores consumer confidence and puts the recall fallout behind in a few short months. That would likely mean a rise in Toyota’s U.S. sales, with the overall market widely expected to recover to around 11.5 million vehicles.

Doomsday scenarios envisage a market share fall to 11 percent, assuming deep damage to Toyota’s brand, possibly through prolonged criminal and regulatory investigations. If overall U.S. sales in 2010 end at 11.5 million vehicles, that would entail a 500,000 unit drop from Toyota’s 2009 sales of 1.77 million.

With General Motors Co , Ford Motor Co, Chrysler and Hyundai Motor Co all offering incentives to lure Toyota customers away, analysts said they were most likely to pick up the most of Toyota’s market share.

On the other hand, analysts said Toyota’s healthy third-quarter results showed a significantly improved cost structure and earnings power.

UBS Securities analyst Tatsuo Yoshida this month raised his 2010/11 operating forecast by 50 billion yen to 600 billion yen assuming a rise in Toyota’s North American sales.

SALES INCENTIVES, PRICING IN THE U.S.

The length and scope of the incentives would sway earnings significantly. Several analysts assume about a $1,000 increase in average U.S. sales incentives per vehicle next financial year, potentially depressing operating profit by about $2 billion.

In addition, Toyota is likely to incur costs from an increase in reserves for the loss of residual value in its used cars.

Deutsche Securities analyst Kurt Sanger estimated the impact from a 1 percent change in residual values to be 15 billion yen, all else unchanged.

LITIGATION COSTS

Litigation costs would depend on the number and nature of the lawsuits, analysts said. At last count, some 40 to 50 proposed class action suits had been filed or were in the works against Toyota in the United States.

JPMorgan Securities analyst Kohei Takahashi sees limited impact on Toyota’s financial strength.

“Even if Toyota were to incur litigation costs on par with Bridgestone Corp, whose tires were blamed for causing 174 deaths, the amount would equal just 1 percent of Toyota’s total net assets,” he said.

Investment Research

($1=91.15 Yen)

(Editing by Lincoln Feast)

Scenarios: Impact of recall saga on Toyota’s 2010/11 earnings