Goldman Sachs Downgrades Toyota Motor To Neutral On Limited Upside

Despite higher sales from the highly profitable Lexus business over the past 24 months, low gasoline prices have led to lackluster sales of the new Prius, which is based on the Toyota New Global Architecture Platform.

"Should sales momentum for the C-HR compact SUV and the Prius PHEV, in which the running distance has been extended to 60 km, improve through year-end, we believe this could boost expectations that Toyota's top-line growth will outpace that of rivals in a difficult business environment," analyst Kota Yuzawa wrote in a note.

Meanwhile, as of end-June, reserves had hit ¥8.7 trillion, more than 40 percent of Toyota's market cap. Amid slowing profit growth, the analyst sees limited scope for dividend hikes and share buybacks on an ongoing basis. The analyst expects FY3/17 dividend per share of ¥210, flat year-over-year, and a dividend payout ratio of 41 percent.

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However, based on its first quarter results follow-up with Toyota, the analyst raised FY3/17–FY3/19 operating profit estimates by 4/3/5 percent to reflect tighter quality cost controls and benefits from price hikes in overseas markets.

"We forecast FY3/18 operating profit growth of 8.1 percent year-over-year, which is higher than our forecasts for Honda (5.7 percent) and Nissan (1.5 percent). However, this mainly reflects a decrease in quality control costs (roughly ¥140 billion impact), and we forecast profits will remain flat in real terms," Yuzawa continued.

Further, the analyst forecast global auto sales growth of 4.7 percent year-over-year in 2016 but just 0.9 percent in 2017 due mainly to the U.S. market peaking out (0 percent growth) and Chinese market contracting (-2.6 percent).

"We see potential upside in overall demand in China depending on government measures to stimulate new car purchases, but in the US it seems the quality of sales is deteriorating judging from incentive levels and auto sales financing trends," Yuzawa added.

ADRs of Toyota closed Friday's regular trading session at $122.08.

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