The Bull Case for Toyota Motors

| About: Toyota Motor (TM)

Investopedia Advisor submits: It’s enough to make any seasoned corporate PR executive wince in pain. First came the headline grabbing multi-million dollar sexual harassment lawsuit against one of its top executives.

This was quickly followed by another front page fiasco when it was announced that the company was recalling nearly a million of its cars to fix a potentially dangerous steering problem amid government threats of a criminal investigation into shoddy recall practices.

Just another bad-news day for one of the beleaguered automakers in Detroit? Guess again. The party-in-question this time around isn’t one of the usual suspects, but none other than the star player in the global auto industry lineup – Toyota Motors (NYSE:TM).

Have the wheels finally come off for Toyota - one of the few operators able to make serious headway in an industry beset by huge structural challenges?

While the front page news over the last couple of weeks has no doubt caused Toyota’s management to suffer a most regrettable loss of face, there is certainly no need for them to consider falling on their ceremonial swords.

The company’s recent performance continues to provide solid evidence of the effectiveness of management’s strategy for winning the US market share battle.

For the first half of 2006, Toyota saw its year-over-year sales jump 9.8%, compared with declines of 3.9% for Ford (NYSE:F), 5.9% for Nissan (OTCPK:NSANY), and a whopping 12% plunge for General Motors (NYSE:GM). It seems that the company’s combination of savvy marketing, attention grabbing style, and keen foresight with its popular hybrid models continues to win over buyers in a market where the competition has had to rely on zero financing plans, cash-back rebates and gimmicky gas give-away schemes to clear cars off the lot.

Outside the US, the company’s sales gains have also been impressive. First-half European sales were up 10% as Lexus sales doubled, and all-model Russian sales jumped 44%. Russia’s red-hot oil economy continues to fuel a consumer buying binge, which Toyota should continue to cash-in on when Camrys start rolling off the assembly line from its new St. Petersburg plant, beginning in December 2007.

All this strong international performance has been instrumental in helping offset the somewhat lukewarm results at home where total Japanese new car sales are down 1.5% year-over-year. However, even at home, Toyota continues to outsell the competition. While Nissan’s and Honda’s Japanese sales slumped 21% and 19% respectively, Toyota’s numbers were off a mere 3%. Looking ahead to fiscal 2007, the company’s guidance is calling for global unit sales to grow by 6% with a corresponding increase in revenues.

Given Toyota’s ability to outshine the competition of late, it’s no surprise that it winds up on the buy lists of most auto industry analysts. Consensus EPS numbers call for gains of 7.5% and 9%, to US $7.68 and $8.38 respectively in fiscal 2007 and 2008 (Toyota’s year-end is March 31). On that basis, the shares trade at a reasonable one year forward P/E of 13x – on par with the global industry average multiple.

The only possible spoiler to Toyota’s current growth story could emerge from the current efforts by Nissan’s CEO Carlos Ghosn to forge an unprecedented global alliance between General Motors, Nissan and Renault. Ghosn, whose nickname is the “Icebreaker”, earned his industry reputation when he turned Nissan around by running roughshod over local business practices – an accomplishment that earned the abiding contempt of Japanese auto industry traditionalists.

If Ghosn manages to once again defy the odds and rebuild GM in Nissan’s image, whose margins are still amongst the highest in the industry, then top dog Toyota could be facing a very formidable foe in the years ahead. Rumors that it might also join the alliance were quickly denied by Toyota management - an indication that the traditionalists will not back away from a showdown with a Ghosn-led alliance, should one emerge.

Given the enormous corporate culture issues involved in such an alliance, and the unclear synergies, I’m going to side with the analysts who see too many problems with this deal to make it any sort of threat to Toyota for the foreseeable future. For the time being, the best way to play the auto sector is to go for quality –and you can’t find better fundamentals than Toyota’s among the majors at this juncture.

By Eugene Bukoveczky, Contributor - Investopedia Advisor

At the time of release Eugene Bukoveczky owned no shares in any of the companies mentioned in this article.