To come to Toyota, we focused on the four Japan-domiciled American Depositary Receipts [ADRs] that recently appeared on at least one of the Reuters Select stock screens. (Click here for an Excel sheet comparing these companies.)
We then screened for the companies with superior management effectiveness statistics. Precisely, we used return on investment [ROI]. ROI is calculated as net income divided by shareholder equity, long-term debt, and all other long-term liabilities. As such, ROI is a more-inclusive measure of performance than return on equity [ROE], which is simply net income divided by shareholder equity, and can easily be buoyed by management using debt financing to undertake expansionary projects that boost net income.
We filtered for companies where ROI was higher than the industry average in both the trailing 12-month [TTM] period and over the last five years. This left us with two automotive companies, Honda Motor Co., Ltd. (HMC) and Toyota. We also want companies that have been improving over time. So, we screened for the company where the TTM ROI was higher than the ROI five-year average. This is where Toyota powered ahead.
There is little that is surprising in Toyota's ROI showing, particularly when one considers the company's solid revenue and earnings growth rates and its industry-leading profit margins, which allowed relatively more of its top-line gains to translate to bottom-line expansion.
Looking closer at Toyota's earnings per share [EPS] in the TTM span, we found that its actual earnings beat analyst estimates by 8.3 percent to 23.7 percent in each of the last four quarters, thus satisfying a key requirement of the Rising Expectations screen. Also, as indicated above, Toyota's 35-percent earnings per share [EPS] growth rate in the most recent quarter [MRQ] is a stark contrast to the general industry contraction, and the company's superior performance helped it meet a requirement of the Lesser Known Stocks screen.
The screen also requires that a stock must be followed by six or fewer analysts - that's how it determines that few on Wall Street are paying attention. At present, there are only two analysts providing fiscal year ending March 2007 EPS estimates to Reuters. On average, those two analysts currently look for Toyota to generate EPS of $8.32, up from $7.43 two months ago. This improvement in the consensus EPS estimate is required for a company to register on the Rising Expectations screen. Prospective investors should note that analysts have also penciled in higher estimates for fiscal 2008: At present, the consensus stands at $9.13, up from $8.00 two months back.
The Lesser Known Stocks screen also examines institutional ownership. It requires that money managers own no more than 50 percent of the outstanding float. To compensate for industries that have relatively little ownership, the screen also requires that institutions own no more than 80 percent of the industry norm. Institutions own 55.11 percent of the average company in the auto & truck manufacturers industry; the figure for Toyota ADRs is only 3.23 percent. Thus, even though Toyota is a household name, it fits with our definition of a Lesser Known Stock.
Both the Rising Expectations screen and the Lesser Known Stocks screen take into consideration stock-price performance. The Rising Expectations screen requires that a company's stock must have outperformed the industry average over the last four weeks, while the Lesser Known Stocks screen is more lenient, requiring that the current stock price must be at least as high as it was a year ago and no more than 10 percent below its level from a month back.
Over the last year, Toyota ADRs have advanced nearly 28 percent, outpacing the 21-percent average gain in the industry. A trend of relative outperformance has continued in the last four weeks, with the average stock in the industry shedding 5.15 percent of its value, while Toyota ADRs have advanced 2.34 percent.
Despite its favorable showing on two stock screens, prospective investors need to be mindful of additional risks associated with investing in ADRs. An ADR represents ownership in a foreign company, and, as such, it exposes investors to additional political, economic, and currency risks inherent to investing in international markets.
Disclosure: At the time of publication, Erik Dellith did not directly own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.