Here are the headlines of 2 articles that I have read on the same day (9th May, 2008 ) from two different sources:
“Weak sales put brakes on Toyota’s profits” – source: TODAY paper, Singapore, dated 9th May, 2008.
“Asian stocks rise to highest since January; banks, Toyota gain” – source: The EDGE SINGAPORE, weekly edition for week starting 5th May, 2008.
Coincidentally, the primary source of these 2 articles is the same – Bloomberg. So, what is exactly going on with Toyota with these 2 obviously contradicting headlines? Here is the analysis.
First, to summarise the key points from TODAY:
1. 4th quarter profit dropped more than analysts estimated.
2. Forecast earnings will fall 27% due to sales slump in the US.
3. Net income fell 28% to 316.8 billion yen. Predicts annual net income to drop to 1.25 trillion yen in the year started April 1, from a record 1.72 trillion last year.
4. The stronger Japanese currency will probably trim 690 billion yen from operating profit – based on exchange rates of 100 yen to the dollar and 155 yen to the euro.
5. Nippon Steel Corp and JFE Holdings, Japan’s 2 biggest steel-makers, raised wholesale sheet steel prices 25 per cent last month to cover an unexpected tripling in annual coking coal prices. Hence, higher raw material costs.
Now, look at what THE EDGE covers:
1. Asian stocks rose…Toyota Motor Corp climbed after its US car sales increased for the first time in five months.
2. Toyota, the world’s No 2 automaker, advanced 2.8% to 5430 yen, its highest close since March 6.
3. The rest of the article covers that Asian stock prices in general rose.
Analysis
When reading contradicting news like these, first, we must compare an apple to an apple. The first article reported the performance of the company and the forecast earnings. It reported the fact that profit dropped and the forecast wll fall based on the sales slump in the US. Operating profit will suffer due to stronger yen and higher steel prices. The second article focused on the stock price of Toyota. A company’s fundamentals such as earnings might not directly reflect the stock price in the market as stock prices are very often affected by other factors than fundamentals, such as analysts’ expectation, market overall sentiment, existing trend and so on. Therefore, it is not correct to compare “earnings” with “stock price” in the very first place.
Secondly, the second article reported that “US car sales increased for the first time in five months”. There were no actual figures to support how significant was the increase and the increase in relative to the recent five months does not provide an insight on the company’s overall performance in terms of earnings. What the article meant to say is probably that the market felt more confident with Toyota after seeing an increase in five months, and therefore, the stock price rose and closed at a high since March 6.
Last but not least the important factor is: timing. THE EDGE is a weekly magazine and this particular article was originally published by Bloomberg on closing of 2nd May, 2008. How can we compare two different pieces of news which were reported 6 days’ apart? And more significantly, these 2 pieces of news were reported before and after corporate announcement. Market sentiments and stock prices swing drastically if what people believe and expect is not in sync with reality. I did a quick google and found out that the stock price indeed increased on 2nd May, however, on 8th May, Toyota reported profit loss and pessimistic forecast, despite the rally from 2nd to 7th May, the stock price fell from 104.76 to 100.21 in midday 8th May.
Lessons learnt: reading news and interpreting news are two different exercises. Reading without understanding the intent of the news may lead you to misinterpreting the underlying message. Overrelying on market prices without analysing the fundamentals will not give you correct insight on the true performance of a company. One last point, don’t act when you know there is an upcoming corporate announcement.
Infinite Wealth 