Toyota Crushed Earnings, but Faces Headwinds

Tickers in this article: F GM TM TSLA

NEW YORK (TheStreet) -- Shareholder reaction is mixed after the world's largest automaker, Toyota Motors , reported record earnings. Profits soared 90% to almost $18 billion for fiscal-year 2014, ended March 31. Japan sales added to the company's profit this year. Vehicle sales increased 16% from fiscal 2013.

Despite strong top- and bottom-line numbers from North America, delivering a profit from Japanese sales has been largely allusive for years. Toyota's domestic profitability may be short-lived, though. Last month, Japan raised the national sales tax from 5% to 8% and as a result, the company expects to sell 165,000 fewer cars this year. Drivers wanting to lock in the lower sales tax rate before April helped fuel domestic demand and likely pushed forward some sales that would have happened during fiscal year 2015.

The primary catalyst catapulting profits comes from Japanese Prime Minister Shinzo Abe. Abe has aggressively stimulated manufacturing and exporting through policies collectively known as Abenomics. As a result of Abenomics, the Japanese Yen has declined almost 20% in the last two years against the dollar.

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That explains why profits can climb 90% while vehicle sales are more modest. Looking forward, Toyota expects sales to remain at this level with estimated fiscal-year 2015 sales of 9.1 million vehicles, and a slight profit decline to about $17 billion. The current year's profit headwinds include two significant recalls impacting the Camry, Corolla, Matrix, Highlander and 23 other models.

TM PE Ratio (Forward) Chart

On a comparative basis, Shares in Toyota are selling at a forward earnings discount in relation to General Motors , Ford and of course, Tesla . The company pays a decent dividend yield of 2.1%. For investors wanting worldwide economic exposure, Toyota is a suitable candidate.

China is a problem, or at least a significant challenge for the company. Older Chinese remember atrocities committed by Japanese troops on family members during World War II. China's recent flexing of its regional influence is straining the relationship between China and Japan. Volkswagen and GM have the strongest brands in China, and it will be difficult for Toyota to capture the lead from them.

I like Toyota as a buy-and-hold dividend play, but investors may want to turn their sights toward GM or F instead.

At the time of publication, Weinstein had no positions in securities mentioned, although postions may change at any time.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.