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Toyota Motor Corp. (TM - Analyst Report) posted earnings per share of ¥138.26 ($1.40) in second-quarter fiscal 2014 (ending Sep 30, 2013), reflecting a strong 69.8% year-over-year rise. The company gained heavily from higher revenues, favorable currency translation and strong cost-controlling measures. Consolidated net income surged 70% year over year to ¥438.4 billion ($4.4 billion).

Consolidated revenues in the quarter escalated 16.2% year over year to ¥6,282.2 billion ($63.5 billion) despite a 0.5% year-over-year drop in the Automotive unit sales to 2.2 million units. Unit sales dropped 6.5% in Japan and 8.6% in Asia. However, unit sales in North America, Europe and Other markets rose 1.8%, 5.5% and 10.4%, respectively.

Operating income was ¥592.1 billion ($6.0 billion), up 73.8% year over year.

The improvement in operating income was attributable to positive impacts from currency fluctuations of ¥280 billion ($2.8 billion), cost reduction activities of ¥70 billion ($707 million), marketing activities of ¥10 billion ($101 million) and other activities of ¥21.4 billion ($216 million). These positives aided the company to offset headwinds associated with rising expenses and others of ¥130 billion ($1.3 billion).

Segment Results

Automotive segment’s revenues rose 16.1% to ¥5,815.3 billion ($58.7 billion) in the quarter while operating income surged 108.7% to ¥499.6 billion ($5 billion).

Financial Services segment’s revenues scaled up 27.9% to ¥347.8 billion ($3.5 billion), while operating income declined 6.5% to ¥82 billion ($828 million). The decline in operating income was primarily due to valuation losses on interest rate swaps.

All Other businesses revenues improved 8.3% to ¥273.6 billion ($2.8 billion) and operating income inched up 0.4% to ¥13.2 billion ($133 million).

Financial Position

Toyota had cash and cash equivalents of ¥1,743.3 billion ($17.6 billion) as of Sep 30, 2013, compared with ¥1,718.3 billion ($17.4 billion) as on Mar 31, 2013 and ¥1,665.4 billion ($21.1 billion) as on Sep 30, 2012. Operating net cash flow improved 58.7% year over year to ¥1,967.1 billion ($19.9 billion). Long-term debt increased to ¥10,590.9 billion ($107 billion) as of Sep 30, 2013, from ¥10,042.3 billion ($101.4 billion) as of Mar 31, 2013, reflecting a long-term debt-to-capitalization ratio of 44.2% against 45.3% as of Mar 31, 2013.

Fiscal 2014 Guidance

Toyota raised its projections for fiscal 2014. Consolidated revenues are now estimated at ¥25,000 billion ($257.7 billion), an increase of 13.3% from fiscal 2013. Earlier, the company projected revenues of ¥24,000 billion. Operating income is expected to rise 66.6% year over year to ¥2,200 billion ($22.7 billion). Net earnings are expected to go up 73.6% to ¥1,670 billion ($17.2 billion), up from ¥1,480 billion expected earlier.

Our Take

Toyota plays a pivotal role in shaping the global automobile industry. The automaker dominates the hybrid market with its Toyota and Lexus offerings as well as the Prius hybrids. Moreover, it is the leading automobile company in terms of global sales, beating General Motors Company (GM - Analyst Report). Toyota is banking on the emerging markets, including Asia, for its sales growth.

However, Toyota faces challenging market conditions in China and Europe. Furthermore, continued safety recalls and subdued macroeconomic factors are detrimental to its brand image and growth prospects.

Other stocks in the automobile sector which are worth considering include Daimler AG (DDAIF) and Fuji Heavy Industries Ltd. (FUJHY). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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