Toyota Motor Corp's surprise quarterly profit and halving of its annual loss forecast failed to convince investors the world's No.1 carmaker is back on track, as government subsidies peter out and a strong yen takes its toll.
Major Japanese automakers have raised their forecasts for the year to March 2010 as they squeeze out savings and government incentives from Germany to China, the U.S. and Japan prop demand through the worst economic crisis in generations.
But with such stimulus programs beginning to run out, Toyota <7203.T> is looking to eliminate more spending, announcing its exit from Formula One racing on Wednesday to put that annual budget of around $300 million to better use.
The biggest challenge for Toyota now is cutting overheads, said Koji Endo, a senior analyst at Advanced Research Japan in Tokyo.
The company has not been able to respond to a sudden plunge in revenue with speedy cost reductions.
Toyota, until two years ago the world's most profitable automaker, is expecting the biggest loss among its domestic peers this year, weighed down by severe overcapacity after adding new factories during its boom years before the financial crisis hit.
While Toyota said it expects an additional 350 billion yen ($3.9 billion) in emergency cost savings than what it had planned three months ago, investors were unimpressed by its revised outlook, especially after the consensus-beating forecasts from rivals Honda Motor Co <7267.T> and Nissan Motor Co <7201.T>.
Toyota expects an operating loss of 350 billion yen for the year to March, smaller than the 750 billion yen previously forecast but bigger than the 293 billion yen consensus from Thomson Reuters I/B/E/S.
It seems too large, Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. Toyota looks a little less attractive than other companies such as Honda and Nissan, he said, adding the market may find the news disappointing.
Toyota shares ended down 0.8 percent before the results, having risen 23 percent this year. Nissan has more than doubled, while Honda is up by almost half over the same period.
Q2 BEATS FORECASTS
Toyota narrowed its annual net loss forecast to 200 billion yen from 450 billion yen, as it lifted its group-based global vehicle sales forecast by 6.5 percent to 7.03 million units.
For the July-September quarter, the maker of the Prius hybrid car reported an operating profit of 58.0 billion yen, down 66 percent from a year earlier but beating an average estimate of a loss of 63 billion yen from five analysts.
Toyota said the overshoot mainly came from improved used cars prices in the United States. Without such finance-related gains, it would have stayed in the red, an executive said.
Second-quarter net profit fell 84 percent to 21.84 billion yen, while revenue dropped 24 percent to 4.54 trillion yen.
For a graphic on Toyota's earnings click http://r.reuters.com/dut77f
Struggling U.S. rival Ford Motor Co
But the yen's strength remains Toyota's Achilles heel as it exports more than half of its vehicles built in Japan.
There's not much we can do to battle the stronger yen apart from continuing with our cost reductions, Executive Vice President Yukitoshi Funo told reporters.
WORK ON CHINA
The second-quarter earnings mark a huge improvement from the previous quarter's 194.9 billion yen loss, as Toyota gradually ramped up production in Japan, where demand for its Prius and other hybrid cars has shot up thanks to generous tax incentives.
But with sales in the key U.S. market still far below their peak, Toyota is aiming to boost manufacturing efficiencies to be able to break even using just 70 percent of its parent-only output capacity.
Analysts expect capacity utilization to improve as Toyota exits a 400,000 units-a-year factory in California that it had held jointly with GM.
On Wednesday, Japanese rival Nissan revised its annual outlook to a profit from a loss as soaring sales in China helped it grab a bigger slice of the fast-growing market.
While red-hot demand in China has been a boon for all brands, Toyota's sales growth there has lagged the overall market's due to a dearth of smaller models that qualify for Beijing's tax incentives introduced this year.
To better cater to local demand, Toyota is looking to beef up its research and development functions in China.
The Nikkei business daily reported on Thursday that Toyota planned to spend 30-40 billion yen ($330-$440 million) to build an R&D center in China as early as next year. Toyota said it had not made any decision, although it has been considering various options in view of local consumer and government needs.
(Additional reporting by Rie Ishiguro, Elaine Lies and Taiga Uranaka; Editing by Chris Gallagher and Lincoln Feast)