This past month, it came to light that there were safety concerns linked to three Toyota models: Camry, RAV4 and Prius V. Specifically, each had failed Insurance Institute for Highway Safety (IIHS) crash tests; however, these tests exceeded government standards. So, in the interest of fairness, it must be observed that these models meet current government safety standards. However, the IIHS data did result in one rating organization moving the above-cited models to their list of automobiles that are not recommended. So, this poses some obvious questions: Will the consumer take serious notice? Will Toyota's stock price be affected? Also, if Toyota's sales are impacted, will American branded automakers stock prices be affected?
If history is a guide, the last time there was a major safety concern about a vehicle, it was in 2000 when it was announced that the Isuzu Trooper had failed Roll Over tests. Today, Isuzu (OTCPK:ISUZF) is no longer in any market as an automaker and its stock is not listed on other than the OTC market. Accordingly, a detailed analysis of exactly how the stock price reacted 13 years ago is not readily available. However, some global observations give us a hint. At the time of the safety announcement, Isuzu already was in the process of withdrawing from the U.S. market. Accordingly, it cannot be said that the Roll Over announcement had a direct effect on what already was in the cards. Also, Isuzu's market niche was diesel engines that were not popular in the United States at the time. In short, they had the wrong product at the wrong time and in the wrong market. Therefore, it is unlikely that the Roll Over test results were a factor in Isuzu's stock price. One of the best things the company had going for it was the hugely popular Joe Isuzu television ads.
For Toyota, the IIHS safety findings involve crash tests that take place under very specific circumstances. Since the models involved are known for stellar workmanship, and meet existing government safety standards, it is likely that the consumer will discount what appear to be limited safety concerns in favor of a major certainty: quality of workmanship.
Of course, we can't see the future, but forecasts can be made with some degree of certainty. First, there is quality. As I said, the vehicles in question are rightfully known for staying out of the repair shop. Secondly, there is tremendous brand loyalty. Third, and this is admittedly subjective on my part, there is style. Simply put, across the board, I think that Toyota vehicles are pleasing to the eye. The consumer can see himself or herself driving a Toyota, and this translates into sales. Therefore, it does not seem likely that there will be a significant decline in Toyota sales or that any decline will be reflected in the stock price of Toyota.
Also buffering any negative impact on Toyota is the fact that the American car market is very long in the tooth. There is in excess of 250 million passenger vehicles on American highways (extrapolated from 2007 data). Of that number, almost 40% are older than 10 years. The average age of cars in America is 11.4 years. This data portends a huge influx of car-buyers in the next few years, and new buyers will more than offset any loss due to the IIHS test results. And, buyers already are in the market. This is seen by the fact that, Ford (F), GM (GM) and Chrysler (now owned by Fiat (OTCPK:FIATY)) have had great years in so far as their stock prices are concerned. Ford is up 70%; GM up 65% and Chrysler up 93%. Major non-American branded companies also have done well: Toyota (TM) up 66% and Honda (HMC) is up 34%. (Note: percentages are rounded.)
How the Toyota situation will play out obviously remains to be seen. But, if there are any benefits to be derived and reflected in stock prices of the American branded (actual ownership notwithstanding) companies, I think Ford is in the driver's seat (pun intended).
Ford's current PE is 12.05; GM's is 16.48 and Chrysler is 20.96. In today's market, all the PE's are reasonable, but Ford's is lowest. Not only does Ford have a lower PE, but its Net Income from Continuing Operations and Net Income Applicable to Common Shares, as a percentage, are better than GM's (2012 data). Chrysler's data is incorporated in Fiat's and could not be independently broken out. The icing is that Ford also pays a $0.40 per share dividend. At today's stock price, this represents a 2.3% head start on any targeted return the investor may have in mind or a 2.3% safety cushion on the downside (November 15th data).
My bottom line is that I certainly would not be selling Toyota stock. However, if I had dollars to invest, Ford would be high on my list.