Toyota profits fall for a second consecutive quarter, missing estimates, as U.S. tariffs hit exports

Toyota Motor raised its full-year operating profit forecast to 3.4 trillion yen, up from 3.2 trillion yen, despite anticipating a 1.45 trillion yen impact from U.S. tariffs. While the company reported a nearly 28% year-on-year drop in September quarter operating profit, missing estimates, strong demand in Japan and North America, coupled with product competitiveness, drove an over 8% revenue increase and supported overall sales volumes. Analysts project continued pressure from tariffs and currency headwinds, with gradual improvement expected, though increasing EV competition, particularly given Toyota's limited fully electric lineup, may cap future upside.

Analysis

Toyota Motor revised its full-year operating profit forecast upwards to 3.4 trillion yen from 3.2 trillion yen, despite anticipating a significant 1.45 trillion yen impact from U.S. tariffs. The company, however, missed September quarter operating profit estimates, reporting 834 billion yen against a 863.1 billion yen forecast, marking a nearly 28% year-on-year decline. Revenue for the quarter increased over 8% to 12.38 trillion yen, exceeding estimates, driven by strong demand and product competitiveness in Japan and North America.

The decline in quarterly operating profit represents the second consecutive drop since the U.S. introduced "reciprocal" tariffs in April, with Toyota absorbing these costs on approximately one-fifth of its U.S. sales. Japanese automobile shipments to the U.S. saw significant declines, with a 24.2% drop in September following a 28.4% decrease in August, despite a July trade deal reducing duties to 15%. Analyst Liz Lee projects continued profitability pressure in the current quarter from tariff and currency headwinds, with gradual improvement expected from the March quarter onwards.

While Toyota's electrified vehicles, primarily hybrids, constituted 46.9% of H1 FY sales, its limited fully electric battery-powered vehicle lineup poses a risk. This could expose the company to increased competition from Chinese EV players in key markets like Europe and Southeast Asia, potentially capping future upside. Despite these challenges, Toyota reported strong global demand, with vehicle sales increasing 4.7% to 5.3 million units in the nine months to September, and aims to continue focusing on sales volume growth and cost reduction.

Key Decisions for Investors

• Investors should closely monitor the stabilization of trade costs and yen currency fluctuations, as these are critical for Toyota's projected profitability recovery in the next fiscal year.
• Evaluate Toyota's accelerated plans for fully electric vehicle development and market penetration, given the analyst's concerns about competition from Chinese EV players potentially capping long-term growth.
• Consider the company's ability to sustain strong sales volume growth and cost-cutting initiatives against persistent tariff absorption and currency headwinds, which continue to pressure operating margins.