That Zooming Noise? It’s the Sound of Mazda Speeding Its Way to Higher Profits

New automotive technologies have already made Mazda’s cars hotter-selling vehicles than many of their rivals; now, the falling yen could boost exports and profits further.

The weakening of the Japanese yen against other currencies, including the dollar, may be bad news for that nation’s own consumers, but it helps make Japanese exporters’ products more competitive in global markets. That is what one of the country’s most significant source of export revenues, the automotive industry, is experiencing today as it is able to ship cars manufactured in Japan to markets overseas, charging lower prices at their destination without having that erode profit margins. And that is good news for automakers like Mazda Motor Corp. (7261.T), en route to reporting earnings that are likely to be even better than analysts currently are projecting.

The decline in the yen has been dramatic, with the dollar rising in value against the Japanese currency from 78 yen per dollar less than a year ago to 91 yen per dollar today. What that means is that an automaker able to sell a car in, say, the U.S. market for $10,000 today has captured 910,000 yen of revenue, as opposed to only 780,000 yen previously. That means an automaker like Mazda – one of those based in Japan and that reports its profits in yen – will see its earnings increase significantly as the yen declines. The company’s fiscal year doesn’t end until March 31, which means that Mazda still has another two full months in which to benefit, and that when it closes the books on the year and announces its results on April 21, it is likely to have generated an even better profit than analysts currently are expecting.

Analysts aren’t oblivious to the impact of the yen on Mazda’s earnings. Indeed, collectively they have raised their consensus estimate for the fiscal year’s operating profit from 24.5 billion yen only 90 days ago to 36.2 billion yen most recently. (In Japan, the most commonly used metric for profitability is operating profit, rather than earnings per share.) The StarMine SmartEstimate is higher still, at 39.6 billion yen, giving Mazda a Predicted Surprise of slightly less than 10%. One analyst, who has received a five-star rating from StarMine for accuracy of his predictions, has published a Bold Estimate of 49.5 billion yen; while that is far above the consensus, the analyst’s track record suggests it be viewed as a not unreasonable forecast.

Mazda has the highest possible StarMine Analyst Revisions Model score of 100, thanks to the fact that analysts aren’t revising their forecasts upward for the current fiscal year alone, but remain bullish on the company’s prospects for the year ending March 31, 2014 as well. Over course of the last 90 days, they have increased their estimates for the next fiscal year’s revenue by 4%, boosted the consensus outlook for operating profit by an impressive 66% and for earnings per share by an even more impressive 73%. The table below shows how the trend in recommendations also has been positive, with analysts becoming less bearish and the number of buy and strong buy recommendations growing.

Admittedly, the horizon isn’t completely free of clouds at Mazda. The company’s capital spending, for instance, remains higher than its cash flow from operations, while the automaker still carries more than 740 billion yen of total debt on its balance sheet. But the company’s operating margins are finally improving, and may well continue to do thanks to the newly introduced CX-5. Added to Mazda’s lineup earlier during the fiscal year, the vehicle boasts its new SKYACTIV technology, which provides increased fuel efficiency and power The Mazda CX-5 has been a great success, earning from a panel of automotive journalists the title of Japan Car of the Year for 2012-2013. The company, moreover, has had to increase its production to accommodate the demand for the model. That is likely to flow through to Mazda’s bottom line, since the vehicle is one of the higher-margin models that the company sells.

Mazda is hoping that the SKYACTIV technology, which is now available with its some of its other vehicles, will give it an additional competitive boost. Within Japan, diesel engines are unpopular; their dense emissions create tremendous pollution problems for the giant metropolises like Tokyo and Osaka. Mazda is the first Japanese company to introduce a clean diesel fuel car in Japan, made possible by the diesel version of SKYACTIV. This will provide car owners the option of a diesel fuel that burns more cleanly than conventional gasoline, and will help Mazda differentiate its lineup.

With operating margins finally on the upswing throughout the current fiscal year, it seems as if the weaker yen and the new SKYACTIV technology may just be the breaks the company needed to boost its earnings.

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