Toyota Motors: A Fantastic Short if We Soon Retest Market Lows

I just read an article concerning the historical behavior of recessions. According to the article, all but one of the US recessions in the last 100 years have retested their lows at least once before climbing out of the recession. The one time that did not happen was during a very mild recession. We have recently set new lows.

This author predicted the approximate retest date of the new lows to be May 20, if history repeats itself. The news Tuesday morning about the prospective IMF report about $4T in toxic assets would argue that we are likely to retest those lows. The recent comments by Mike Mayo and other well known banking experts about the banking problems still to come lead one to believe the same thing. This is still arguable, but it does seem likely that we are still in for a rough ride in the near term, given the news of the last couple of days. If this is so, what should we do?

One company that looks ripe for shorting is Toyota Motors (TM). We all know the story of GM, Chrysler, and Ford (F). However, those stocks all trade for less than $5. How much money can you make shorting them?

Toyota trades for $73.23 as of the end of business today. It is up from $57.68 on Mar. 9, 2009. It has just turned down, but it is still near its top Bollinger Band. It is currently trading above the analyst’s one year target price of $72.37. It sports a “Sell” rating. It has a TTM PE of 17.80, and it currently is expected to lose money in 2009. It is unclear exactly how much, but Toyota’s sales are down 37% for the first three months of 2009. Mar. US sales fell 39%, which is pretty close to the 41% of that US automaker Ford (current stock price about $3.50. Virtually no manufacturer makes money under those conditions. You might think the Prius would be a saving grace, but it is a low margin car for Toyota. It is also sitting on lots because the price of gas has gone down recently. If anything it looks to be a big loser for Toyota this year. As for other cars and trucks, many of them guzzle gas at nearly the same rate as American made cars and trucks. They are generally reliable, but is there any reason to run out to buy one this year. No!

TM is going to suffer just like the American automakers. The American consumer is just not anxious to spend money on big ticket items. This trend seems likely to continue throughout the year as the unemployment rate rises.

Perhaps one could argue that Toyota will benefit from GM and Chrysler’s problems. This is likely true to some extent. We have certainly seen that Ford has noticeably picked up a higher percentage of the business. Toyota has picked up some too. However, with Toyota’s size, it just isn’t that noticeable. It also is not likely to last. Ford, Chrysler, and GM all have one thing in common. They are being forced to cut costs. They are being forced to streamline. They are being forced to get rid of debt, and the government is helping them do this. In fact Ford recently did an equity for debt swap to rid itself of nearly $10B in debt (about 40% of its total debt). What should be the outcome of all of this? The Big 3 should be more competitive with foreign car makers. The government is ensuring that the Big 3’s labor costs come into line with the foreign automakers’ costs for labor. The many year edge that the foreign automakers have had is disappearing in a cloud of smoke. The Big 3 may be hurt in the short term, but they look like they should emerge from all of this as leaner and more competitive companies.

If Chrysler gets Fiat’s technology, they could quickly become a big player in the small, fuel efficient car market. This will be important in the years following the recession. Oil is likely to shoot up again as the recession ends. Ford too is strategically going after the small, fuel efficient car market. The Big 3 are being forced to listen to the desires of the buyers. As a result they will be more competitive. In the longer term, this means Toyota and others will likely lose business to these formerly stodgy, slow moving guys from Detroit. There is no pot of gold at the end of the rainbow for Toyota (i.e. after the rain of the recession clears).

The recession has also brought on a minor wave of “buy American”. This will likely hurt the foreign automakers for some time to come. Additionally there is a proposal for a “Cash for Clunkers” bill to give $3000 to $5000 vouchers to people who trade in cars older than 8 to 10 years for new, more fuel efficient cars. Apparently the foreign automakers’ cars will have to “qualify” for these vouchers. One gets the impression that this may well turn out to be a somewhat protectionist measure for Detroit. The details of all this are unknown at this time. Congress is set to discuss this bill after it returns from its two week hiatus.

In sum things are looking slightly up for the Big 3. In contrast Toyota is being hammered by the recession in much the same way as the Big 3. They are losing a lot of money, yet the stock price does not reflect this. Admittedly TM has only 1.6B shares compared to Ford’s 2.4B shares, but still the dichotomy in the prices seems huge if they are both losing money at similar rates (or will be soon). TM is a larger company; it recently supplanted GM as the largest automaker. Still given its price, there looks to be a huge downside to TM with the prevailing economic conditions. It is also unclear that TM will get fully included in the “Cash for Clunkers” windfall, if that bill is enacted in the near future. This is another problem for TM. If the market decides to retrace to its low, TM is likely to retrace to the $57 level or below. If the stock market just wanders sideways for the next month or two, TM is likely to retrace at least to its 100-day EMA line, which is currently at a little over $67. Even this movement would provide a nice profit.

TM is just below its top Bollinger Band. This is usually a good impetus for a stock to move downward, especially after it has just made a dramatic move upward. TM is overbought based on both the Williams%R of about -10 and the slow Stochastic value of about 90. It definitely looks like TM should move down from its current price. The only question is how much. I would suggest shorting it into the $67 to $68 range. If things still look promising then, you could take half off the table. You could continue to short into the $57 or below range, presuming the market continues to fall. During this time, you want to pay attention to the progress of the “Cash for Clunkers” bill. If this is passed, it might push TM up again, providing TM is “qualified” to accept these vouchers. It could hurt TM, if TM cars do not “qualify” for these vouchers (or only qualify partially). You may also want to pay attention to the progress of Chrysler. A Chrysler bankruptcy might give TM a slight lift (or it might have just the opposite effect). My own thinking is that the government will try hard to prevent a Chrysler bankruptcy. They have already extended Chrysler’s deadline once.

I have attached the TM chart illustration to the left. The colors for the main (top) chart are:

Blue Line – stock value of TM

Yellow Line – 100 day EMA of TM

Green Line – 50 day EMA of TM

Red Line – 20 day EMA of TM

Brown Lines – upper and lower Bollinger Bands

I have also included a chart of the SPY.

The slow Stochastic for SPY still shows it as overbought (a value of about 80) for the near term. This means it still has a lot of room to move downward.

Disclosure: Short TM

Comments

[David White:]

Apparently the European autmakers surged today as Daimler said it thought its cost cutting measures would mean that quarters after Q1 should be better. The American and Japanese automakers seem to have gone up in concert with the European automakers. I don't see this having a huge effect on the Big 3 or the Japanese automakers. They are still greatly dependent on US sales. Mercedes, BMW, and Porsche just don't do the volume in the US other automakers do. Notably Volkswagen (a high volume seller in the US markets) is down today, even though it is a German automaker. Eventually the market will realize the high volume US sellers should be reacting more in line with Volkswagen than with Daimler or BMW. Fiat is also down today. Toyota is more of a Volkswagen than it is a BMW.

Apr 08 12:04 PM

[David White:]

DJ: The Volkswagen US Chief said today, "we may not see an auto market recovery before the end of 2009."

DJ: TM will idle its new Tupelo, Miss. Prius factory when it is finished (until demand improves).

This is another expense that will cost TM money.

Apr 08 12:13 PM

[Mad Hedge F...:]

Toyota is still the world's best run car company. General Motors (GM) has 6,500 dealers in the US and Toyota Motors has 2,000, but Toyota sells more cars than GM. And you want to save this company? Just as only Nixon could go to china, only Obama can dispatch GM. The launch yesterday of its Segway-GM hybrid, the Puma Pod, just highlights how pitiful their efforts have been. The sooner GM goes to corporate Heaven (or Hell), the better.

Apr 08 01:06 PM

[Thadeus Tho...:]

This is actually not accurate. Even now.
Mad Hog Hunter :
""General Motors (GM) has 6,500 dealers in the US and Toyota Motors has 2,000, but Toyota sells more cars than GM""

If you check last months sales, and even sales for the quarter, GM STILL sold more vehicles than Toyota or Honda. In fact, even Ford just sold only 1700 less than Toytota. Sorry Mad Hog Hunter. Facts:

www.autoobserver.com/2...

Apr 08 01:20 PM

[David White:]

I believe the truth is that Toyota currently has the biggest sales worldwide. GM is still the leader in the US. GM used to be the leader worldwide.

Another point about the Cash for Clunkers proposed legislation:
Congress could easily designate this legislation as a part of the Big 3 bailout. Then all of the extra business would go to the Big 3. Since they certainly need it, this would actually make sense. Congress could make certain exceptions for highly fuel efficient cars such as the Toyota Prius. This still wouldn't do much for Toyota's overall sales. Since Congress is not bailing out any of the foreign car makers, there would be no conflict or protectionism (that could be argued successfully).

Apr 08 02:07 PM

[David White:]

Mad Hedge Fund Trader:
I do agree that the Segway-GM hybrid and Puma Pod news was a little pitiful. However, that may just be our ingrained thinking. It may be that people will want extremely small, fuel efficient vehicles to take themselves places in the future. When China and India begin to use even a quarter of the amount oil that the US uses per person, we will be in dire need of vehicles like the ones shown. Oil will be extremely expensive if we haven't moved on to alternate fuels or combinations of fuels by then. Currently China and India use less than two barrels/person/year. The US uses 26. This data is from about a year ago, so it might not be exactly accurate today. However, you get the general idea. At that point a lot of people would probably be happy just to be able to afford to drive to the stores, etc.

Admittedly this could be a ways into the future at the moment. However, it may only be 5-10 years into the future.

As for whether we should save the Big 3, I think the unequivocal answer is yes. There are 3 main reasons:
1) Failure of the Big 3 at this point would likely cause a minimum of 1,000,000 job losses. There are the mechanics, the parts manufacturers, the dealership sales and finance people, other brokers and finance people, all the people that finance the dealerships and the parts manufacturers, all the businesses dependent on the people who earn money doing one of the above, etc. A loss of jobs of this magnitude at this time would start another downward spiral in the recession. We could well fall into a depression. The above losses would likely cause a cascade effect in other areas. No one wants to see that.

2) The US automakers are a strategic defense concern. The US needs its own automakers in order to have the ability to prepare for wars.

3) The US automakers are a strategic economic concern. The US needs the US automakers to be competitive with foreign automakers in order to have a good chance of reversing the trade deficit. The alternative of allowing the Big 3 to fail will almost ensure a bigger trade deficit. Reversing the trade deficit is the only path to longer term economic prosperity for the US. We have been kidding ourselves about the lack of an imperative to do this. This recession is being brought about by our self deception that we can keep borrowing from foreign governments forever. We need to address the trade deficit issue. Two of the biggest areas of concern in that regard are the oil deficit and the auto/truck trade deficit. The US needs to take decisive actions in both areas. I like to believe that is why the Obama administration is using this opportunity to institute real change at the Big 3 automakers. This is a strategic move for longer term prosperity in the US. As such, it bodes ill for Toyota's future sales in the US. After people get over seeing the Big 3 as weak, they will begin to see the cracks in the foreign automakers' armor. There is no guarantee this restructuring will be entirely successful. I for one am hoping it will be. I like a lot of the things I have heard so far.

Apr 08 02:35 PM

[Tony C:]

<<< In fact one point of "qualification" might simply be whether or not the new car in the deal was made in the US. This would at least exclude imported TM vehicles from benefitting from the proposed new legislation. >>>

Congress can't put that limitation on the Cash For Clunkers bill. Doing so would exclude nearly all of Chrysler's cars, all its minivans, GM's best selling sedan, and much of Ford's sedan and CUV lineup.
It would more likely be worded "made in North America," which the public would never read thru to realize how much Detroit imports from our neighbors.

Apr 08 03:38 PM

[User 387439:]

Yes, there is a lot of " ingrained thinking" about GM going on in the country. What the real pity is that so many are ready to bash GM, or Chrysler, or Ford when in Europe , Japan, and other countries, they support their auto makers and their companies in general. Regardless of your politics, financial status, career or occupation it wouldn't hurt to get past petty jealousy, class prejudice and more by having a more altruistic attitude. Lately, I wonder about whether this whole country deserves to survive. GM didn't pull a Berny Madoff. AIG employees and bondholders didn;t have to take a hit like they want from GM. What's with that?
I for one, am getting more than a little concerned about the "kick 'em when their down" heartless attitude of so many Americans.

Apr 08 04:50 PM

[Thomas J. G...:]

I think it's very useful to think about what is currently fully valued and would drop if the stock market keeps going down and the economy doesn't improve. You short some of what meets this criteria. If the market goes up you lose on your shorts and gain on your generally long portfolio. If the market tests new lows you have some green on the screen from your shorts. But why would I short toyota with a p to e of 17 when amzn has a p to e of 40+?

Apr 08 04:59 PM

[David White:]

Reading the Fed Minutes today, I was reminded how badly Japan itself is doing. There was a double digit GDP decline in Japan in Q4 of 2008. TM probably won't be doing well at home this year either.

Also the Fed predicts now that US unemployment will continue to rise thoughout this year. It should level off next year. Then it will begin to improve. This likely means that this will be a very bad year for auto and truck sales in the US. The first half of next year likely won't be much better.

The Fed minutes make a short of TM seem even more sensible.

Apr 08 07:00 PM

[David White:]

Thomas Gordon: AMZN has a PE of 51.5 today and an FPE of 40. Those are both fairly high. I might take profits in AMZN at this point. TM has a PE of 18.6 today and an FPE of infinity since it will lose money in 2009. AMZN is at least expected to grow this year. You can't say the same for TM, which is likely to lose billions of dollars. I am not actually invested in AMZN, but it is the industry leader in online retailing. I would rather buy AMZN stock than TM stock at this point. TM seems likely to lose money in 2010 also. This is why it is likely a good stock to sell short for the near term. It still has a price which reflects its "old" PE. The fact that the Fed is saying that we will continue losing jobs (i.e. have increasing unemployment) throughout 2009 means the losses for the automakers will likely be large. The Fed believed the unemployment rise would level out approx. by the end of this year. We would have to rise from there. We presumably would have over 10% unemployment by then.

Apr 08 08:45 PM

[11togo:]

Toyota is like the squirrel that prepared for a long cold winter, while most every other automaker failed to do so. Toyota's cash cushion will allow them to take share when the good times return.

Apr 08 09:45 PM

[Did U Think...:]

You mean to tell me you wrote that whole windy article and failed to mention that TM has 117bn in debt and only 22bn in cash? To whom will TM roll its debt over when it suddenly finds itself losing money in a deflationary depression?

TM is in worse financial shape than GM is but nobody gets it. Yet. That 117bn is a crushing amount of debt, simply crushing.

Apr 08 10:20 PM

[Thomas J. G...:]

David,

Thanks. That's a good answer. I have an emotional problem shorting toyota. I like their cars, I have bought a lot of them, and they've been good to me.

Apr 08 11:26 PM

[zagrebzagreb:]

Mad Hedge Fund Trader: Toyota is NOT the world's best run car company.... Please.

Toyota makes cars for people with low aspirations, bargain hunters, and the morass of America. It's cars do horribly in Europe, where there is real competition and a sophisticated market that knows the difference between a car and an appliance.

If you want to look at how its done, take a look at Porsche's holding company, which swallowed up a controling share of the Volkswagen Group. Plus Porsche has profit margins that are to die for... That's more like it!

Apr 09 01:34 AM

[David White:]

Good news for the market. Bad news for this trade. The Trade Deficit came in significantly under the market estimates this morning. It sent the market up. The surge upward might even continue into next week. If you are short, it is probably better to get out now. Then you can re-enter your short position at a slightly later time at what now seems likely to be a better price. The Trade Deficit for Feb. was approx. $26B. The expected deficit was approx. $36B. Obviously I was not expecting this kind of surprise when i suggested this trade at this time.

Apr 09 09:07 AM

[David White:]

If that news wasn't bad enough for this trade, Wells Fargo announced this mornign that they will have great profits in Q1 of 2009. They projected a $3B profit for Q1. They projected $5B in annual merger related cost savings. This has brought WFC and the entire banking industry up sharply. It looks like this will be a big rally day for the general market. TM will eventually go down. However, it may run up a little more first. This news item along with the Trade Deficit item may push the markets up for several days.

Apr 09 09:12 AM

[David White:]

Did U Think: Good point about the debt. TM does have a lot of assets also though. This year TM has announced that they are going to lose $5B for the full year (Apr 2008 through Mar 2009). I would not be surprised to find out it is more than this. TM reports May 8 (Yahoo Finance). This report should also give some hint about how much TM will lose this year (Apr. 2009 through Mar. 2010). It seems likely to me that TM will lose even more money, especially since they have been scaling back at many plants. This makes the plants' operations less efficient. This brings the price per unit up. I have to believe the losses will be huge for this year. Unemployment is lated to get worse throughout 2009. Not very many people will be buying new cars. I think this should be a good play through earnings (i.e. to the downside). Unless TM basically lies about their likely future results this year, the report should be bleak. By then the market may have reversed course also, so TM should be getting a little help going downward at that time. I think this play on TM has definite merit.

Apr 10 01:55 AM

[David White:]

The news this morning indicates that the US government has requested that GM prepare the groundwork for a bankruptcy filing for a June 1 deadline. This may be the trigger for the selloff in TM. TM has said it will lose $5B in the fiscal year ending in March. It will likely lose much much more by next March.

On the other hand the GM news may just result in a quick down move before the likely better than expected banking results lift the entire market, TM included. For this reason it is still debatbable whether to sell TM short now or to wait until after the banking news of the next week or two.

Apr 13 08:51 AM

[David White:]

We will have to watch the markets closely next week. The rally has been going sideways for a while now. It may finally break downward on the "stress test" data, which comes out Thursday, May 7. That will be one good signal that a short of TM would work well. Certainly insiders have generally been selling into this rally, especially in the last few weeks.

Plus we have received another strong signal that TM may be in for a sell off. The automakers reported April sales numbers today. They all showed year over year losses. However,Ford and Honda seemed to stand out as the better performers. They showed the least decreases in their sales numbers (-31.5% and -25.3% respectively). TM on the other hand had relatively dismal results (-41.9%). This was even significantly worse than GM (-33.2%). This clearly puts TM on my short list. It has a very high stock price. It has a reasonable TTM PE of 18.78 (Yahoo Finance). However, it has no FPE (i.e. it is expected to lose money in the future). These latest numbers likely mean that it will lose even more money than many people had expected. Today's numbers could be the trigger for a big down movement in TM stock. This will still likely be dependent on overall market action. However, with this result the likelihood of such a move has increased dramatically. TM reports Q1 earnings on May 8, the day after the stress test results come out. This could be yet another catalyst for a sell off. Negative guidance or a complete lack of guidance may trigger a big sell off. You may want to get in ahead of the rush.

May 03 06:21 PM