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On January 11, we maintained our Neutral recommendation on Toyota Motor Corp. (TM - Analyst Report) despite the challenging scenario in the Chinese and European markets, based on its improved fiscal 2013-second quarter earnings and opportunities from its expansion in the emerging markets.

Why Maintained?

Toyota witnessed more than threefold increase in profits to ¥257.92 billion ($3.28 billion) or ¥81.44 ($1.04) per share in the second quarter of fiscal 2013, ended Sep 30, 2012 from ¥80.42 billion or ¥25.65 in the same quarter of prior fiscal year.

The increase in profits was attributable to strong demand for Toyota vehicles as well as positive impact from the cost-control measures. However, profits were lower than the Zacks Consensus Estimate of $1.62 per share. Revenues in the quarter grew 18.2% to ¥5.41 trillion ($68.75 billion) on a 14.9% rise in sales volume to 2.16 million units.

Following the release of the second quarter results, the Zacks Consensus Estimate for fiscal 2013 declined 1.9% to $7.18 per share. Meanwhile, the Zacks Consensus Estimate for fiscal 2014 declined 1.7% to $8.11 per share.

Toyota occupies the leading position in the hybrid cars market offering Toyota and Lexus brands of vehicles as well as the Prius hybrids. Since 1997, the automaker sold more than 3.4 million hybrid vehicles until December last year. The company plans to launch about 21 gas-electric hybrid vehicles together with a fuel cell vehicle by 2015.

Toyota is expanding its foothold in the emerging markets to improve its sales volume. The automaker plans to launch 8 compact car models in the emerging markets of Brazil, China, India and Indonesia by 2015 in order to compete with the leading automakers in the market. Toyota also plans to manufacture the new vehicles in the emerging countries to reap the benefit of low cost components.

However, the past series of recalls have damaged Toyota’s reputation. Further, it continues to face difficulties from strengthening of yen and power shortages in Japan due to the meltdowns at Fukushima Daiichi nuclear power plant after the earthquake.

Other Stocks to Look For

Daimler AG (DDAIF) is performing well in the same industry, where Toyota operates. It retains a Zacks Rank #2 (Buy).

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