A friend of mine likes to tell a story about how the first car he bought in the 1990s was a brand new Toyota Corolla that stalled in the middle of the 101 freeway in the San Francisco bay area, leaving him feeling very vulnerable and causing him to swear off all Toyota (TM) cars. He has since then purchased a number of cars made by Ford (F) and appears to be happy with them.
I had personally experienced a stalling issue with a new 2000 Toyota Camry that would manifest itself only when I exited a freeway and was stopped at a red light without manually turning the cruise control off. The dealer could not figure out why this was happening and the problem went away after a few months. In contrast I had very good luck with two Fords and still sometimes regret trading in my reliable 35th anniversary Mustang for an IS 350. Both these incidents occurred during a period of time when Toyota enjoyed the unblemished status of being one of the safest car companies and went on to surpass General Motors as the largest car company in the world. With two cars made by Toyota parked in my driveway (the IS 350 is affected by the recall), I have to say that over the years I have been satisfied with the quality and reliability of these cars.
Stalling of a car especially in the middle of a freeway could be dangerous but there is little that can unnerve drivers more than an accelerator pedal that gets stuck or brakes that do not do their job when needed. The situation Toyota faces right now has a number of parallels with the sudden acceleration related issues that Audi ran into in the mid 80s. The company issued a number of recalls and sales suffered as a result of the media attention the case received. It later came to light that there were really no problems with sudden acceleration and that most of the reports related to sudden acceleration had to do with human error. However the damage to Audi was already done and it took Volkswagen's luxury brand a number of years to recover from this negative publicity. Given Toyota's global reach and product lines, the impact of these recalls will probably not be felt as deeply at Toyota as they were at Audi.
These recalls and the associated media circus will impact Toyota in a number of ways including,
- The direct cost of the recalls, which is estimated to range anywhere from $1.1 billion (Toyota's estimate) to as much as $4 billion (analyst estimates).
- The intangible impact on Toyota's brand, which until now was synonymous with quality.
- Loss of sales estimated at close to $1 billion by the company.
- The impact on the brand potentially leading to pricing and hence margin pressure in the near term.
- Defending against individual and class action lawsuits.
Toyota has shed more than $33 billion of its market cap since these recalls began but to ascertain if Toyota looks attractive at these levels, I am comparing several financial and valuation metrics of Toyota versus competitors like Honda (HMC) and Ford in the tables below. With the acquisition of Jaguar and Land Rover from Ford, India based Tata Motors (TTM) has also become a global player and I have included this SINLetter favorite in the comparison as well.
These car companies are complex entities with operations in many countries and a number of product lines, so simple valuation metrics may not give us the complete picture but they provide a starting point for further analysis.
|Levered Free Cash Flow (billions)||$3.47||$3.15||NA||NA|
|Enterprise Value/Revenue (ttm)||1.12||1.78||1.17||0.50|
|Enterprise Value/EBITDA (ttm)||23.95||22.02||14.68||-239.15|
When you look at some of these valuation metrics, at first glance Ford actually looks more attractive than its peers with a trailing P/E of just 13.7 and a P/S of 0.33. However these numbers mask the fact that Ford's profits in 2009 were primarily driven by Ford Credit and the automotive division lost money last year. The $132 billion in debt on Ford's balance sheet is also as a result of Ford Credit and automotive debt at the end of 2009 was "just" $34.3 billion. Ford does expect its automotive division to post a profit in 2010 after excluding special items.
Toyota's stock is currently trading at very close to book value at a price of $73.90, off 19.48% from its January 19th high of $91.78. In contrast, at the height of the financial crisis, the stock hit a low of $57.68 on March 9, 2009 and fell well below book value. There remains a distinct possibility that Toyota shares still have a ways to fall especially in light of the fact that they don't exactly look cheap when compared to peers like Ford and Tata Motors. According to some estimates Toyota is losing $500 million in sales each month right now.
Given that the nearly one year old market rally appears to be sputtering and attractive investments are still available in the small cap sector, I would personally hold off on investing in Toyota at this juncture.