Times are tough in the U.S. auto market. Just ask Toyota.

The Japanese automaker, in a race with General Motors Corp. to be the world's largest car company, reported lower-than-expected earnings Thursday for its fiscal fourth quarter as a strong yen and weak U.S. sales took their toll.

Worse, the company said it expected profit to fall 27% this year and forecast a 5% drop in annual sales, which would be its first in nine years.

"We are facing a severe business environment," Toyota President Katsuaki Watanabe said in a statement. "However, Toyota considers this head wind as a valuable opportunity to turn it into a more flexible and stronger company."

Toyota's New York-traded shares, in the form of American depositary receipts, slid more than 5% on the news before recovering a bit to close at $100.56, down $4.20.

"It tells you that the slowdown is not limited just to domestic brands. Even the Japanese brands are not unscathed," said Efraim Levy, an analyst at Standard & Poor's who cut his rating on Toyota from "buy" to "hold" and lowered his 12-month price target on its stock to $108 a share from $121.

U.S. light vehicle sales, which include cars, pickups and sport utility vehicles, are down almost 8% this year through April. Levy is forecasting total U.S. sales in 2008 of 15.1 million vehicles, 1 million fewer than last year.

Like its American counterparts, Toyota reported strong results in non-U.S. markets. But North America accounts for about half of Toyota's operating profit and a third of its sales.

Besides high gas prices, the decline in U.S. sales is tied to the slump in the housing industry -- which has been especially damaging to pickup sales -- and to general worries about economic weakness and job losses.

Toyota is under additional pressure from a strong yen, which is now trading at around 103 to the dollar compared with about 120 a year ago. That drives up the cost of imports for Americans.

Although about 55% of the vehicles Toyota sells in the U.S. are assembled at North American factories, the company still imports a significant percentage of its vehicles from Japan -- including the Prius hybrid, which has been a big seller as gas prices have soared.

Rising prices for raw materials, especially for steel, are also taking a toll, analysts said.

Toyota reported a net profit for its fiscal fourth quarter ended in March of 316.8 billion yen ($3.05 billion). That was down 28% from a year ago and was the company's first quarterly profit drop in almost three years. Sales rose 3.8% to 6.567 trillion yen ($63.14 billion).

martin.zimmerman

@latimes.com