“This seems to be the quarter when automakers are turning in a better than expected numbers. As with many other automakers, here is what Toyota had today, a surprise profit in its quarterly earnings released early this morning, mid morning in Japan, a profit of $242 million that’s down 84% from the quarter a year ago. Sales, $50 billion, down 24%.

The thing to keep in mind with Toyota swinging to a profit is that it’s all largely based on government incentive programs around the world certainly helps. However, the strong yen continues to be a problem for it is offsetting the recovery that’s the reason why as Toyota was discussing its quarterly results, the company has said it has some concerns ahead of it. Toyota has cut its expected annual loss in half. Take a look at shares of Toyota. And again, like many of the automakers, benefiting from these incentive programs, boosting sales around the world. But Toyota has the added burden of the strong yen because it exports so many vehicles from Japan.” — CNBC’s Squawk Box 11/5/2009

Toyota Motor (TM), the world’s largest car company, joined Ford Motor (F) in reporting a surprise profit in the most recent quarter.  Toyota reported $232 million in profit following three straight quarters of losses thanks in no small part to government stimulus efforts around the globe.  Remember, during the U.S. Cash for Clunkers program, Toyota was one of the clear winners as their cars outsold all others.  TM

Toyota still expects to lose money in fiscal 2010 which closes in March, but they have improved their full year earnings guidance from a loss of $4.9 billion to a loss of $2.15 billion.  The better guidance is thanks to an improved sales outlook, which the company raised by 430,000 units to 7.03 million units.  Furthermore, the company continues to take steps to reduce costs in such notable ways as pulling out of Formula One racing.  These efforts are aimed at making the company leaner and hopefully profitable in a very uncertain environment.  Management cautioned that demand for autos would return slowly in many markets.  Additionally, the stronger yen cuts into profits from exports as Japanese made goods become more expensive in foreign markets.

When you consider the degree to which auto sales have fallen over the last year, it is pretty amazing that two of the largest automakers in the world were able to report quarterly profit.  Of course, the government stimulus that steered buyers towards the automotive sector has played a huge part in this, and the government gravy train has likely pulled away.  However, Toyota and Ford have gone to tremendous lengths in order to streamline operations and become more competitive.

We can applaud these automakers for their nascent turnarounds, but at this point we cannot recommend them as investments.  We recently downgraded Toyota to Overvalued because of there are still very significant challenges ahead.  The fact that Toyota may likely continue to deal with currency headwinds is just another concern, and one that Ford is not dealing with.  From a valuation perspective, the stock has begun to show progress, but the fundamentals have eroded so much over the past year that it is too expensive for us to recommend. 

Toyota Joins Ford and Swings to a Surprise Profit