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Toyota (NYSE: TM) announced a few weeks ago that it may delay the remodel of several of its popular vehicles - including the Avalon and Sienna - in order to focus on improving global quality ratings. On its way to becoming America's second largest automaker and likely the largest global manufacturer, it overworked its engineering staff and has been forced to recall 2-3 million cars in the last 24 months (including my own 4Runner whose replacement part remains on backorder).

Recently Toyota also had to assure the Japanese government that it would soon address these manufacturing issues to avoid significant fines, and remains on track to triple its engineering hires from 350 to almost 1,000 in 2006-07.

Along with Costco (COST), Starbucks (SBUX), Berkshire Hathaway (BRK.A) and Apple (AAPL), Toyota is one of the world's best companies, and its automobiles are second to none in providing the best possible product for a wide range of consumers. The company chose to address these issues now to alleviate any continued quality concerns and damage to its reputation as it prepares to make a stronger push into Europe, China, and the US.

On track to potentially surpass General Motors (GM) in overall global sales in the next decade, Toyota has seen the best and worst of times in 2006. It accurately predicted the shift to smaller, fuel-efficient vehicles amidst rising oil prices, enabling it to achieve double-digit revenue growth and, for a short time last July, become the second largest car seller in the US. It began developing its proprietary hybrid technology in the mid-1990s, culminating in the popularity of its Prius and the introduction of a hybrid Camry this year. It will likely capitalize on the corporate struggles at Ford and the diminishing sales of its best-selling F-series pickup by launching a redesigned Tundra full-size pickup in 2007. And it's finally ramping up production in China, destined to surpass Japan as the world's second largest car market, and successfully introduced the Lexus brand to its home market (Japan) this winter.

However, the company has also experienced some significant quality and legal concerns. As Toyota continues its recall of 2.6 million cars in the US over the last four years, the Japanese government recently initiated a criminal investigation into possible negligence by executives regarding a known steering part defect that may have contributed to several deaths. It also settled a sexual harassment suit concerning the former president of its North American operations, forcing him to resign and replacing the head of human resources who had ignored the woman's concerns. Because of these questionable business activities, its global chief chose to apologize to the Japanese government for recent events, pledging to make significant changes to operations and oversight.

All said, Toyota continues to achieve high marks in quality surveys, and buyers seem to be willing to give it the benefit of the doubt in order to save money at the pump. In its latest earning report, profit rose by nearly 40%, and the firm remains on track to earn nearly $12 billion on sales of $200 billion. The stock has climbed almost 20% in the last year, but still trades for a reasonable price/earnings multiple of about 13. With a 24-day supply versus and industry average of 64, Toyota maintains the highest car inventory turnover (and thus inventory efficiency/sell-through rate) for US auto sellers, and still possesses several years of double-digit growth.

As an example, based on initial sales reports, the new Camry has become the US's best-selling passenger car. Dealers possess an average of 10 days' supply - the car sits on the lot for only 2 days - and within 24 months the company hopes to expand capacity at Subaru's facility in Indiana to produce 200K more Camrys. Its new FJ truck and Yaris compact have experienced similar success in their production numbers, and the firm chose not to increase Corolla prices to maintain sales volume. Lastly, the new Tundra in 2007 will steal significant truck share from Ford (Ford sold 900K F-Series pickups in 2005) as GM attempts to simply maintain currently sales levels with its new Silverado.

At a price in the mid 90's/share, I believe Toyota stock should be considered a core holding in any portfolio.

Disclosure: Author has no position in TM

Source: Toyota's Development Slowdown and Quality Improvement Are Smart Moves