The past two years have not been kind to Toyota (TM: Charts, News, Offers), the world’s largest automaker by sales and production. Last year, widely publicized recalls culminated in a $32.4 million fine levied by the Obama administration. This year, the tragic earthquake and tsunami in March knocked the company’s sales down 33.4% to a 16-year low for May, the worst performance the company has posted since 1995, when the company was half its current size. To make matters worse, the company then recalled 106,000 of its best-selling Prius hybrids over a single accident, and reported declining sales in China.
Now, as political uncertainty looms in Japan as a recession officially begins, Toyota faces strong headwinds moving forward as Ford (F: Charts, News, Offers), the newly restructured General Motors (GM: Charts, News, Offers) and an increasingly powerful Hyundai threaten to marginalize Toyota in several key markets. Can Toyota get its act together to avoid a collapse, and does the stock’s current weakness represent a rare opportunity for patient value investors?
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Due to the earthquake and tsunami on March 11, Toyota was hit by supply shortages and a loss of several plants that resulted in the company operating at less than 70% capacity when it resumed vehicle production on April 18. However, the company has optimistically announced that the company would return to 90% capacity in June. For May, out of the 1,061,719 vehicles sold in the United States, Toyota sold 108,387 units, claiming a market share of 10.2%. This drop caused the company to fall from third to fourth place in the American market, yielding its long-held position to Chrysler.
To alleviate its pressure in Asia, Toyota had previously cut North American production by 70%, which it now plans to increase to a 30% reduction. While these are signs of the company’s improving health, Toyota is making reductions in a time when ever unhindered automakers are facing severe growth bottlenecks due to rising fuel costs and lower discretionary spending. While demand for its Prius hybrids has remained high, the company anticipates inventory shortages as production will be unable to meet demand.
Speaking of the Prius, Toyota recently recalled 106,000 of its first generation Prius hybrids due to a faulty steering component. The single accident which prompted the recall occurred in the United States, where the company cautiously wishes to avoid another debilitating fine. The recall affects 48,000 vehicles in Japan and 58,000 sold abroad, manufactured between 1997 and 2003. This brings the total amount of recalls over the past two years to 14 million.
Toyota is not alone in its misfortune – last month Honda’s (HMC: Charts, News, Offers) Accord and Civic, Toyota’s Camry and Corolla all lost their positions in the top ten highest selling vehicles in the United States. GM’s Chevrolet Malibu, with a 17.9% sales increase, became the best-selling vehicle in the United States. The Chevrolet Cruze also advanced to 8th place.
Toyota announced that it sold a mere 38,500 cars in China in May, a 35% plunge for the same period last year, partially attributed to the disaster in Japan. Over the first five months of 2011, the company sold 294,000 vehicles in China, a 2.1% decrease over the first five months of 2010. This weakening position in China is a boon for General Motors and Ford, which have been gaining considerable ground in the Chinese market, as well as Chinese automaker Geely, the parent company of Volvo. In addition, South Korean automaker Hyundai posted a 13.6% sales increase in May over the same period last year, denting Toyota’s Asian market share further.
Although dark clouds are on the immediate horizon for Toyota, the company is trading near book value, where it has traditionally found support. Prior to its recent troubles, Toyota has steadily increased its quarterly dividend – most recently it paid 74 cents per share at the end of March – and as the company’s outlook improves, so will its dividend. The stock currently trades with a P/E of 25, and is far from its 52-week peak of $93.90, seen back in February.
Other News About TM
Toyota rolls out the new Prius V
As Toyota recalls one model, it introduces a new one.
U.S. car sales in May dip 3.7%, Toyota sees 33.4% dive to 16-yr-low
Toyota sales lead the decline in American car sales.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
