Toyota Motors (TM)
Toyota Motors (TM: Charts, News, Offers) has had a truly terrible year, with multiple recalls sullying the once pristine reputation of the world’s largest automaker, and declining revenues trailing the aftershocks of the 2007-2010 financial crisis. The stock has been pounded down near 52-week lows, and currently trades with a P/E of 19.24 and trades under book value, with a 0.92 P/B ratio. Has Toyota become a stock that should be bought by value investors following the primary rule of Benjamin Graham, to buy great companies which have fallen under book value, or is it a falling knife that should be avoided at all costs?
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Stock Analysis
Toyota Motors functions on a pyramid, three-tiered system in which it sells larger quantities of cheaper vehicles (Yaris, Corolla, Scion), a medium number of median priced ones (Camry, Prius, Tundra) and a small number of the highest priced luxury offerings (
Lexus). The Tundra, Lexus and Prius are three of the most important models in their lineup. The Tundra pickup is its offensive strategy in North America to take on similar models from GM and Ford (
F:
Charts,
News,
Offers) in an effort to appeal to the distinctively heavy duty, utilitarian tastes of the North American consumer. The Lexus is its high margin luxury line, which had been primarily sold in the US but is now being aggressively spread into Japanese and Asian markets. The Prius is Toyota’s flagship hybrid, which many believe to be the future of all automobiles. Toyota’s hybrid division, mainly fueled by the popularity of the Prius, took 73% of the hybrid market in the past two years. Notably, Toyota has shifted away from its “one size fits all” ideology; it has now meticulously targeted vehicles for particular markets.
Starting in September 2007, Toyota has been plagued with a series of serious recalls, starting with the infamous “stuck accelerator” problem which was at first attributed to a heavy floor mat. The problem was investigated for years, with more models being recalled, until finally brake overrides and tubes began being identified as problematic. The headaches didn’t stop there; more and more cases of shoddy quality control surfaced – defective front drive shafts, corroded spare tire carrier cables, programming errors in SUV stability control systems, errors in software steering systems, broken valve springs and steering column components, to name only a few. CEO Akio Toyoda was brought before the House Committee on Oversight and Government Reform in the U.S. in February the company was fined $16.4 million for negligence that resulted in accusations of wrongful deaths and injuries across America. Last week, Toyota announced a recall for over a million vehicles in regards to a faulty component in the engine that could cause it to stall and fail to restart. This most recent recall stands to bring the number up to over 8 million in just the past three years, at a conservative estimated cost of over 3 billion USD. The automotive world has been left in dumbstruck awe, wondering whatever became of the world’s most trusted brand, once revered for its quality and value and responsible for the decades-long decline of Detroit steel.
Toyota’s competitors have capitalized upon the recall by offering trade-in deals for owners of affected vehicles. Chrysler, Ford and Hyundai have all offered $1000 trade-in cash or rebates for those who traded in their old Toyotas for one of their new vehicles, in order to not only capitalize on a new discounted sale, but the subsequent maintenance costs as well.
Despite all the pessimism that surrounds Toyota, the company maintains its view of a projected 48% rise in profits for FY2011. FY2010 ended with a net profit of 209.4 billion yen, with Q4 netting 112 billion yen and bringing the company back into profitability, over the 766 billion yen loss from the previous year. Despite these positive numbers, overall sales declined 8% and the number of cars sold dropped 4%. Cost cutting measures and the continued popularity of the Prius and Corolla models helped pad its bottom line, despite a slim net profit margin of 2%. Another threat to Toyota’s bottom line is the expiration of government subsidies for hybrids in the US, which would raise the price of these cars and leave them to flourish on their popularity alone. However, it has a head start against American automakers when it comes to the federal 2020 35 mpg mandate.
Despite having a market cap of 108.7 billion USD, Toyota still has room to grow. Its revenue growth in mature markets – Japan, America and Europe, has slowed due to saturation and a slower turnover rate in vehicles. Toyota has instead set its sights on the BRIC emerging markets. It is especially invested in India, where it currently lags behind Suzuki, GM and Hyundai. The company has already begun making engines through Toyota Kirloska, a majority owned partnership with India’s Kirloska group. The company plans to unveil its first exclusive Indian small vehicle in late 2010 at its Bangalore plant.
Toyota is one of the largest companies in the world, and its stock is now trading under book value. This fallen stock was once Wall Street’s prime choice to replace GM in the Dow back in the depths of the financial crisis. The company is sure to survive all the recall ugliness and be on track to repair its quality control and reputation soon, and once it does, it will start to reap the profits of its advanced hybrid line and the stock price is likely to appreciate quickly. To quote Buffett’s immortal words, “Be greedy when others are fearful.”
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the
Stock of the Day analysis.
