Investors, like motorists, should beware of speed traps. The rapid rise in value of Japanese automakers is a case in point. After a 5 per cent gain on Friday, Nissan’s share price is up by nearly a third this year. Toyota and Honda joined in the rally. Yet the assumptions driving the big three’s performance may prove overly optimistic.
To be sure, there are grounds for encouragement. Nissan’s profit forecast topped analysts’ estimates. Even though earnings for the year to March were hardly stellar, its strategy of raising prices for its cars appears — finally — to be working. Toyota expects operating profit to rise by a tenth in the current business year. Honda is boosting shareholder returns with a record high dividend of ¥150 — five times that of its last fiscal year — and buybacks of as much as $1.5bn.
Yet there are also big challenges. Nissan missed its target of reaching a 5 per cent operating margin for the fiscal year. It cut its global car sales target in February.
Local makers have suffered the largest sales decline among foreign brands in China. That is because they remain behind global peers in the shift to electric. Honda does not yet have a mass-market electric car and Toyota’s battery electric cars account for just 0.4 per cent of total sales in the latest fiscal year. Toyota is dealing with a public relations disaster as affiliate Daihatsu rigged safety tests for some Toyota-branded cars.
Despite these issues, the shares of the trio all trade at a premium to most of their global rivals. For Toyota, which trades at 10 times forward earnings, that premium has continued to widen in recent years. It is now nearing a level triple that of global rival Volkswagen.
Much depends on how rapidly the three companies can mass produce electric cars. To sustain such lofty valuations, the big three need to pick up the pace.
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