Toyota: This Dip Offers Another Exciting Opportunity

| About: Toyota Motor (TM)

Toyota Motor (TM) is known throughout the world for its reliability and low maintenance, and the Corolla model emulates the value Toyota offers. Over time, Toyota has evolved the Corolla to suit the market requirements while keeping its core offering intact. This evolution continues till date, as the markets are demanding environmentally friendly and stylish cars. With the objective to produce greener and cleaner cars, Toyota launched new hybrid Corollas in Japan last month. Additionally, the U.S. market will have a sportier and sleeker version of Corolla this month.

In this article, we have taken the two latest Corolla models and analyzed their effect on TM.

Shifting to green in Japan

Toyota launched a hybrid version of the Corolla Axio sedan in Japan. This hybrid version is the 11th generation of Corolla. As Japan is becoming more eco-conscious, the launch of the hybrid Corolla meets the demand for more eco-friendly cars. Hybrid cars accounted for 20% of all automobile sales in Japan last year. The hybrid car launch forms an important part of Toyota's long-term plan in the Japanese market; its hybrid cars accounted for 14% of the global sales and 40% of its sales in Japan last year.

The launch of this hybrid version of Corolla will help Toyota capture the market left by its flagship model Prius. While the Corolla Axio hybrids in Japan come at a price of around $19,604, Prius models come at a much higher price tag of around $30,000. As of July this year, the Prius has a market share of 11.1% in Japan. Toyota Corolla Axio's price makes the hybrid car more accessible to the masses; the Prius demands far higher premium because of its superior hybrid technology.

The hybrid version of the Corolla is 50% more fuel efficient than the gasoline version. These cars have compact lightweight hybrid engines, and achieve mileage of 33 kilometers per liter under Japan's testing standards. Hybrid Corolla sales are expected to receive a boost from the rise in gasoline prices due to uncertainty continuing in certain parts of the Middle East.

Toyota Motor, Nissan Motor, Honda Motor, and Mitsubishi Motors have jointly decided to build the infrastructure facilities for their hybrid vehicles. This would include the installation of battery charging stations throughout Japan, which would help drivers to recharge their cars. The Japanese government will bear some of the cost of installing charging stations through subsidies. Therefore, we believe that hybrid cars will receive a bigger push in the years to come, benefiting Toyota in the process.

The closest competitor to Toyota in the Japanese market is Honda Motor (HMC). Although Honda has maintained presence in hybrid sedan segment in Japan through their launch of the hybrid Honda Accord, it doesn't threaten Toyota Corolla's market share because the hybrid Accord comes with different specifications at a price point of around $37,000. It's a larger sedan than the hybrid Corolla, and its offers a slightly lower fuel efficiency of 30 kilometers per liter.

Through the launch of the hybrid version of Corolla Axio in the Japanese market, Toyota will be able to cater to the hybrid mass market in Japan. While Honda has presence in the hybrid car market, there is no immediate competition to Toyota Corolla Axio. The hybrid Corolla will help the company to grow its revenue as Japan's hybrid car segment continues to rise.

Corolla to become younger again

Toyota has scheduled the launch of the new Corolla in September of this year in the U.S. This model will help the company to compete with Honda and Ford Motor (F) in the U.S. compact car market. The new Corolla will compete with Honda Civic and Ford Focus.

To compete in this segment, the Corolla has been redesigned with a new, sportier look. With the new Corolla, Toyota wants to broaden its reach to younger buyers. Those under the age of 30 make up 40% of the potential cars buyers in the U.S. This group has population strength of around 80 million and a collective spending of $1 trillion. This makes them a target for the car manufacturers.

According to Bill Fay, group Vice President of the Toyota Division in the U.S. -- "We should appeal to a little younger buyer and broaden out the appeal of the car".

Through the launch of the new Corolla, the company expects to reach a total sales target of around 300,000 units of Corollas this year.

Toyota has strong competition in the compact segment from the Honda Civic. In July of this year the Civic's sales in the U.S. were 32,416 units, which is a growth of 29.6% year over year, while Corolla had a 3.5% rise. The redesigned 9th generation Honda Civic was launched in 2011 ahead of Toyota's new Corolla launch and helped Honda to increase their market share in the compact car segment.

The Ford competes in this segment with its model Ford Focus. Focus' sales have been increasing during the last two months. The June 2013 sales increased 9% year over year, and July sales registered an increase of 1.9% year over year. The Focus model's sporty look and price competitiveness in the compact car market is driving sales.

Let's compare the number of units sold for each model discussed in the following table.


Units Sold (as of July 2013)



Toyota Corolla




Honda Civic




Ford Focus




Source: MOTORTREND & focus2move

It is evident from the table that Honda Civic sales zoomed past Toyota Corolla sales after the launch of current Civic version. Toyota Corolla car sales grew last year by around 21% over 2011 while the growth of Civic was around 43% and Focus was 40% in the same period. This further shows how Corolla was losing market share to its closest competitors.

We believe that the launch of the new Corolla in September will provide the required boost in sales by making the car more relevant to the competition in the compact car segment.

Mileage of the stock

Here we have made a comparison on the values of the competitors



Forward P/E

Toyota Motor



Honda Motor



Ford Motor




Looking at the above P/E ratios of Toyota, we find its price to be attractive at present market conditions. Toyota's strategy is clear -- Get the low hanging apple first. The hybrid version of Corolla Axio in Japan fills a void in the market and has relatively no competition.

The new generation of Corolla in the U.S. market faces much steeper competition, but the new design will make the car more relevant. Honda and Ford are formidable competitors of Toyota, and they have been growing their compact-car market share through their brands Civic and Focus. While it is true that the sales growth of Honda and Ford are very high compared to Toyota, these growth rates are likely to moderate once the new Corolla comes to the U.S. market. The high growth rates of Ford and Honda in the compact segment supports their attractive P/E valuations.

Overall, Toyota has consistently moved with market demands when designing the Corolla line of cars over the years. Therefore, now is a good opportunity to add the stock to your portfolio and watch it grow.

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.