Given the 1.4 trillion (US dollars) that will be invested in government bonds and private assets in Japan during the next 2 years, it is definitely worth the time verifying the numbers of companies like Toyota (NYSE:TM) and Honda (NYSE:HMC). I will start with Toyota in this article and check Honda in the next one.
Avalon 2013, source: toyota.com
Numbers should always have priority over any subjective analysis. The following image shows a simple quantitative analysis presented in a layer or checklist-type format that I call Plan 21. My research methodology tends to focus more on a future growth analysis rather than solely relying on pure deep-value models. The aim is to have a system that is both straightforward and comprehensive by taking into consideration key elements from the income statement, balance sheet and cash flow statement without loosing attention on the business expansion for coming years.
Only companies with positive EPS (twelve trailing months) and positive growth for the current year qualify for the analysis. A glossary for the abbreviations is included at the end of Part II. As a reminder, we always need to be aware that estimates are multivariable dependent forecasts that carry the inherent risk of future prediction.
Data for calculations: Thompson Reuters, Yahoo finance, SEC filings
Earn=earnings, Rev=revenue, GtY=growth this year, GnY=growth next year, EGnY=earnings growth next year, Ind=industry, EGn5Y=earnings growth next 5 years, Acc=acceleration, Dec=deceleration, CF/S=cashflow per share, FCF/S=free cashflow per share, CCC G=cash conversion cycle growth, Op Margin=operating margin, GVN=growth and value number, GLEN=growth and lean equity number, DCF=discounted cash flow, PT=price target
Toyota passed the test with a 76.5% score, or a C+ rating. Any company with a score greater than 70% should deserve further analysis.
The stock price is currently around $107. Even after its big advance that started on October 2012, it still trades at a 23% discount to DCF. It has a GVN greater than 2 and a 24% earnings growth estimate for next year.
There are mainly a couple things that I don't like about the stock right now:
- The company has a 110% total debt to equity ratio
- The revenue growth estimate for this year is -0.5% and the FCF/s estimate for this year is negative too
I can live with those numbers for this year given the prospects for the next. It is not an A grade stock, but it has good growth and value numbers. Its weakness is mostly related to its balance sheet given the high debt number, which tends to be common in the auto industry. Toyota Motor looks to me like a good surfboard to ride the Japanese cash tsunami.
In my next article I will verify the metrics on Honda Motor Corp so we can compare them with Toyota's numbers.
Let me know what you think about TM. Until the next one.
Parameter Selection and Acceptance Criteria Rationale
There are some non-conventional metrics included in the tables:
Parameter #15 (GVN) is a growth and earnings yield hybrid that takes into consideration the company size, earnings and growth. An acceptable result must be greater than one (1) since that means a better safety margin when compared against an investment grade corporate bond benchmark. I developed the GVN in the spirit of having a more reliable growth-value metric (compared to a 5 year estimated PEG).
Parameter #16 (GLEN) is a growth and balance sheet quality measure. A positive value is required in order to separate the best balance sheets from the rest without ignoring the growth of the company. I created the GLEN in an effort to have a more practical and comprehensive measure than the net current asset value (NCAV).
Additional notes about Plan 21:
Only companies with positive EPS and positive growth for the current year (parameter#1) qualify for the analysis.
Parameters 1 trough 5 have two requirements each. Each requirement is worth 0.5 points.
The acceptance criteria for parameter #2 varies as a function of company size and other considerations. The requirement for revenue is differs from the earnings one.
Parameters 3 and 4 are the differences between the stock growth and the growth of the industry and the sector. A negative number means that the growth of the stock is estimated to be smaller than the estimated growth of the industry or the sector.
Acceleration is calculated using only numbers from the previous year, estimated current year and estimated next year. Absolute differences are used, not percentages.
The results reported for ROA, ROE and margins reflect how much the measure of interest will increase or decrease based on estimates (absolute increase/decrease, not growth).
The annual CCC uses the past 2 years for calculation.
DCF uses a 50% safety margin for growth, a 0% long term growth and a 10% discount rate (10% is about the average of the very long term stock market return, is also about twice the current BAA corporate bond yield and more than twice the AAA yield).
Stocks receive additional credit for DCF discounts greater than 20%.
There are three possible outcomes for the bonus result: 0 points, 0.5 points or 1.0 points. These bonus points are awarded to companies that comply with specific growth and share structure requirements at the moment of evaluation.
Disclosure: I am long TM, HMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Any content in this article should not be considered as a recommendation or investment advice given that financial objectives and individual needs of the end user have not been evaluated. Suggestions or tips are for information purposes only and there is no guarantee on stock returns or market performance. All readers must use their prudence and consult their financial advisors before acting on any of the securities or suggestions mentioned or engaging into any other high risk investment. I do not hold any responsibility and can not be held liable for any losses incurred (if any) by acting on the information provided.