Toyota Long Term Outlook Positive As Critics Gather

Despite the threat of automotive industry upheavals and shakeouts, Toyota sails on serenely as regulators demand everything is electric, starting tomorrow.

Some institutional investors have objected to Toyota’s determination to eliminate carbon dioxide emissions gradually. The annual meeting on June 18 will discuss this and recent scandals, but a report from Moody’s Ratings affirms its A1 rating and raised the outlook to positive from stable.

“This …… was driven by Toyota’s continued improvement in its credit profile despite ongoing challenges in the automotive sector and escalating competition,” said senior analyst Dean Enjo in a report.

Last month CreditSights, a Fitch solutions company, said Toyota needs to gear up for the EV market while noting the huge success of its hybrids.

CreditSights said Toyota’s automotive operating margin increased 4.7 percentage points to 11.2% in fiscal 2024. Electrified vehicles, of which 95% were hybrids, accounted for 37% of Toyota’s vehicle sales in the financial year.

Toyota said after financial results it will have to invest heavily in electrification. In its fourth financial quarter ended March 31, Toyota’s operating profit jumped 77% to the equivalent of $7.34 billion, compared with the same period of 2023. Toyota also said operating profit would fall 20% in the current financial year including increased but undisclosed spending on EVs.

Moody’s talked about Toyota’s positives behind the affirmed rating and improved outlook but expressed negatives too.

“The company has generated historically high levels of sales, profit, and EBITA (earnings before interest, taxes and amortization) margin, which we expect the company to maintain at similar levels over the next 12 to 18 months,” Enjo said.

“The rating is constrained by the uncertain, evolving competitive landscape, including regulatory changes, investments needed for electric powertrains, and rising competition globally. The rating also takes into account rising governance risk due to recent incidents of data falsification during government testing. In addition, the issuer rating reflects significant capital and research and development outlays on Toyota’s strategic expansion towards battery electric vehicles,” the report said.

Moody’s conceded Toyota’s margin would fall a bit over the next year and a half because of increased costs, but still expects the EBITA margin to remain in the high to mid-teens.

The annual meeting will discuss recent scandals including problems with government vehicle testing rules which halted shipments of some models. The Financial Times Lex column headed “Toyota is driving a dangerously fine line”, said the meeting will also discuss what it called “growing discontent about the board”, said to lack the required independence, and seeking the removal of the chairman Akio Toyoda.

Toyota recently doubled down on its insistence that internal combustion engines still have a big role to play. In a joint press conference with Mazda and Subaru, Toyota unveiled a new generation of ICE engines designed to be used alongside batteries in hybrid and plug-in hybrid vehicles. Variants of the engines will be capable of running on gasoline or diesel, or carbon-neutral fuels like hydrogen or so-called e-fuel.

Mazda and Subaru are partly owned by Toyota.

Investment bank UBS liked the idea.

“We think an expanded ICE electrification line-up including plugin hybrid electric vehicles and hybrids could provide a realistic solution for profit maximization and become a powerful driver of sustained and expanded sales shares in 2024-2030,” UBS said in a report.

According to Statista of Germany, Toyota sold the most autos globally in 2023 – 11.23 million, compared with 2nd place Volkswagen on 9.24 million.