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Toyota's Profits Slowing Down, But Don't Write Them Off Yet

The news out of Tokyo should not come as a surprise. Toyota, running neck and neck with GM to become the world's largest automaker, is running a little slower.

The first quarter earnings make sensegiven the auto market slowing down in the U.S. and Toyota finding fewer markets and segments to enter.

It also raises the question of whether Toyota is ready to transition from growing by expansion to growing by sales improvement. I think it should be fine and I'll explain why in just a bit.

But first, look at Toyota's performance January through March.

The company made $3 billion in profits.That's a 28% drop in profits from the first quarter of last year. Not only that, but Toyota is forecasting a 27% decline in profits for all of '08 with sales increasing 1.6%. Both of those are below analyst estimates.

The full year profit drop would be the company's first in a number of years. Blame the decline on Toyota's North American business slowing down with the economy, a stronger yen, higher raw materials costs and the fact that there are simply fewer untapped markets and segments to expose.

While Toyota is trying to blunt the impact of its growth slowing down in the U.S. by rapidly expanding in China, Eastern Europe, and the Middle East, the truth is Toyota is transitioning into a period where it will have to grow profits not through expansion but by winning over incremental sales in mature markets. Yes, this will likely mean profits growing at a much slower pace, but I think Toyota is positioned perfectly to do this.

Its strength in hybrids gives Toyota a natural point of differentiation with competitors. Don't be surprised if the Prius is expanded into a full line of models. The Japanese automaker will also boost earnings by leveraging it's production system to squeeze out costs. Finally, Toyota's presence with flexible assembly plants in all of the world's key markets means it has greater flexibility to shift production, as needed, in the years to come.

Don't make the mistake of taking Toyota's slowing profits as a sign that the bloom is off the rose for the Japanese automaker. Competitors and investors have made that mistake in the past, and they paid dearly for prematurely writing off Toyota.

Questions? Comments? BehindTheWheel@cnbc.com

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