Investors, like motorists, should watch out for speed cameras. The rapid rise in value of Japanese automakers is a case in point. After a 5% increase on Friday, Nissan’s stock price is up nearly a third this year. Toyota and Honda joined the rally. However, the assumptions driving the performance of the big three may prove overly optimistic.
Indeed, there are reasons to be encouraged. Nissan’s earnings forecast beat analyst estimates. While earnings for the year through March haven’t been all that stellar, its strategy of raising the prices of its cars appears to be — finally — working. Toyota expects operating profit to increase by one-tenth this year. Honda is boosting shareholder returns with a record 150 yen dividend — five times its last fiscal year — and buybacks of up to $1.5 billion.
Yet there are also great challenges. Nissan’s outlook missed its target of achieving an operating margin of 5% for the current fiscal year. It cut its global auto sales target in February.
Local manufacturers suffered the largest sales decline among foreign brands in China. This is because they lag behind global competitors in the electric shift. Honda still doesn’t have a mass-market electric car, and Toyota’s battery electric cars accounted for just 0.4 percent of total sales in the last fiscal year. Toyota is facing a public relations disaster as subsidiary Daihatsu rigged safety tests for some Toyota-branded cars.
Despite these issues, the trio’s shares are all trading at a premium to most of their global rivals. For Toyota, which trades at 10 times its forward earnings, that premium has continued to rise in recent years. It is now approaching three times the level of global rival Volkswagen.
Much depends on how quickly the three companies can mass-produce electric cars. To sustain such high valuations, the big three have to pick up the pace.
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