Making A Smart Choice: Should You Add Toyota To Your Portfolio?

| About: Toyota Motor (TM)

After becoming the world's biggest carmaker in 2008, Toyota (NYSE: TM) has subsequently had a tough four years. Its strong FY 2013 earnings results, however, reveal that it has recovered nicely and even become a stronger company. Is it time for investors to once again start buying Toyota stock for their portfolios?

Toyota on the Rebound

For FY 2013, Toyota reported that its operating income had reached ¥1.3 trillion ($13.7 Billion), a substantial increase from the ¥367.7 billion ($3.8 billion) reported in the previous FY. The results were attributed to the strong performance of the company's automotive operations, which recorded net revenues of ¥20.4 billion ($215 million) and operating income of ¥944.7 billion ($9.9 billion). The improved results were attributed to increased production volume as well as vehicle unit sales and its global efforts to reduce costs. The company's results also benefited from a favorable exchange rate.

In terms of its geographic markets, Japan remained Toyota's biggest market, generating ¥12.8 billion ($135 million) in sales, followed by North America with ¥6.3 billion ($66.4 million) and Asia with ¥4.4 billion ($46.4 million). Toyota's guidance for FY 2014 forecast results of ¥23.5 billion ($248 million) net revenues and ¥1.8 billion ($18.9 million) operating revenues, based on the assumption that the exchange rate would be ¥90:$1 and ¥120:€1. However, these results could actually be much higher given that the current exchange rate is ¥96:$1 and ¥127.9:€1.

Due to these healthy results, the company's stock prices have been surging. From its closing price of $119.70 following the release of the earnings report, the stock has reached a closing level of $121.15 on June 10. This is a substantial increase from the closing price of $75.59 the stock closed at on June 11, 2012. For shareholders, this means that the value of the holdings have increased by some 60.3 percent.

Toyota has also been able to rebound from the setbacks it suffered in 2009, when it had to recall some 3.8 million vehicles amid allegations of acceleration problems, and the Great Japan Earthquake that devastated the country and disrupted Toyota's production, causing profits to drop an estimated 30% by June of 2011. By the end of 2012, recalls had cost the company tens of billions in fines as well as a $1 billion settlement of a class action suit. Toyota also lost its standing as the top carmaker, falling to third place behind rivals GM and Volkswagen. In addition, the strong Japanese yen also impacted the company's overseas sales.

By 2012, however, it had regained the top spot with 2.49 million unit sales across its five car brands. The rebound was due to a series of decisive moves made by Toyota executives to regain customer confidence by demonstrating that they were dealing with the problem. Apart from making apologies to consumers and dealers, Toyota has also moved some of its production outside of the country to improve quality, in particular opening some US plants. This has also made it easier for some US buyers to shift to Toyota since the cars were technically made in the USA. As of Q1 2013, it still holds the title World's Largest Carmaker with sales of 2.4 million vehicles in the first quarter of the year.

The Bottom Line

One of the most important things to remember about Toyota is that, despite the recalls, it still remains a respected brand among car buyers. According to the latest survey by Millward Brown of the most valuable brands in the world, Toyota reached the top spot among carmakers, with an estimated brand value of $24.5 billion, and an overall ranking of 23 among all brands. In addition, its brand value actually increased by 12% from 2012.

Helping to enhance its brand has been the carmaker's success with electric-gas hybrid vehicles. As of March 2013, cumulative worldwide sales of Toyota's hybrid vehicles exceeded five million units, of which two million were sold in the US. The company is currently selling some nineteen hybrid passenger car models and one hybrid plug-in in some eighty markets around the world. And between now and end-2015, Toyota expects to introduce eighteen new hybrids and estimates that its hybrids will sell some one million units annually over the same period, one-third of which will be made in the US.

In addition, Toyota maintains its brand loyalty among customers. A survey conducted by Consumer Reports in February 2013 on brand perceptions found that Toyota came out on top when consumers were asked to extemporaneously name off the top of their heads the best car brand in areas such as safety, quality, performance and environmental friendliness. It is also worth noting that thousands of US customers continued to wait for the Lexus and Toyota vehicles they ordered while Toyota worked to restore its supplier base.

The only major fly in Toyota's ointment is its weak presence in the Chinese market, the world's largest market for automobiles, compared with its US rivals, who have been enjoying burgeoning sales. This is mainly due to anti-Japanese sentiment in China following tensions regarding the two countries' rival territorial claims in the East China Sea over the Diaoyu/Senkaku islands. But this tension may be easing somewhat as Toyota recently reported that its car deliveries to China had increased to 79,000 units in May, a slight increase from the 78,700 in the same period last year. In addition, Toyota is also increasing production in China, with its output for the month of April increasing to 72,955 units. The carmaker said it is aiming for deliveries of 900,000 units to China in 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.