Nissan's Stock Gets Blindsided

Negative earnings news has slammed Nissan's stock, wiping out $4.7 billion in market value

by Ian Rowley

Carlos Ghosn's ability to meet—and regularly beat—tough targets at Nissan (NSANY) has been a cornerstone of the Japanese automaker's success under the Brazilian native's leadership. It has also helped Nissan deliver the kind of margins and shareholder returns Detroit can only dream about.

Yet, following worse-than-expected results for the quarter ending Dec. 31 and a just-released, full-year profit revision, global investors dumped Nissan shares with a vengeance in trading at the Tokyo Stock Exchange on Feb. 5. Nissan's shares closed down 8.4% to $11.45, a one-day swoon that erased about $4.7 billion off the company's market capitalization.

The "near-term recovery story that everyone expected is now over," wrote Tatsuo Yoshida, analyst at UBS in Tokyo on Feb. 5. "Nissan over the past few years was able to deliver what they promised [at] the beginning of the year, but they failed to do so this time." Yoshida also downgraded Nissan's stock from a "buy 2" to a "reduce 2" rating.

For sure, Nissan's third-quarter numbers (the company's year ends in March) weren't great. Despite the introduction of several new models, quarterly operating profits fell by 16.6%, to $1.58 billion, compared with a year earlier. Unit sales, meanwhile, slipped 3%, to 795,000 vehicles. For the year ending March, 2007, Nissan cut both operating profit and net profit targets by 12%, to $6.67 billion and $3.96 billion, respectively. That means Nissan's full-year profit will almost certainly fall for the first time in seven years.

What's more, the figures would have been worse if it wasn't for a weaker yen benefiting Japanese automakers (see BusinessWeek.com, 2/1/07, "Who's Cashing In On the Weak Yen?"). "Against an environment of high raw material and energy prices, no pricing power, and continuing weakness in mature markets, our industry faced many headwinds," Ghosn said in a statement. "For the first time since 1999 risks outweighed opportunities."

Not Time for Optimism

Speaking in Tokyo after the results were announced, Nissan Corporate Vice-President Joji Tagawa added that tough conditions in the U.S. market, where Nissan earns about 60% of its operating profits, had been a big factor. Tagawa said passenger car sales, aided by new models such as the Versa compact and Sentra and Altima sedans, had risen by 17.5% in the quarter, but truck sales had fallen 8%.

And while January wasn't too bad—Nissan sales were up 8.9%, compared with a 19% drop at Ford (F)—Tagawa adds that the U.S. market, as a whole, is not "one which you can be optimistic" about and that Nissan's recovery from a drought of new vehicles is taking longer than hoped (see BusinessWeek.com, 6/1/06, "Potholes Ahead")

"The fourth-quarter recovery will be slower than our initial assumption," he says. That will make it difficult for Nissan to meet its aim and boost U.S. sales by 10% or more during the six months ending March, 2007, and post global sales for the fiscal year of 3.73 million units.

Still Seeing Healthy Margins

For all that, Nissan's weak results should be put in context. Compared to most automakers, Nissan's weak quarters are only comparatively weak. Its operating margin for the quarter ending December was still a healthy 7.8%, and its new models, such as the Altima and Versa, have been well received.

In Mexico, for instance, where the Versa is built, the company added a third shift in January to meet demand. The company is also maintaining its target to sell 4.2 million vehicles during fiscal 2008, a 20% return on invested capital, and a top-level operating profit margin. "It goes without saying that for fiscal year 2007, we will continue to be guided by the commitments taken under Nissan Value-Up," Ghosn added.

Analysts also reckon that Nissan and alliance partner Renault, which Ghosn also heads, are tooling up to make gains in some of the world's fastest growing markets, particularly India. "In 2009 and 2010, Renault-Nissan will be shifting a gear, especially in emerging markets," says Hirofumi Yokoi, an analyst at CSM Worldwide in Tokyo.

Still, Ghosn has work to do after the disappointing numbers of Feb. 2. Top of the list: regaining investor confidence.