Now, I can see why people buy shares of highly valued companies like Netflix (NFLX) and Amazon (AMZN). They are leaders in their field, they are growing revenues and profits at double digit rates (mid double digits I should say) and are executing on all levels. Now, I am short NFLX because I think AMZN, Google (GOOG) and Apple (AAPL) among others, are going to siphon off subscribers and slow that growth. Note: I did not say destroy the company, just slow the growth. But, when you are priced for 70% growth, if it doesn’t happen, the stock crashes (see 1999-2000).
Now to Toyota (TM). Remember they are an automaker.
2 years ago TM was the leader in the auto world taking over for a then struggling General Motors (GM) and Ford (F). Since then its US market share has slipped 17% and they now trail GM and are in a close race with F for second. Globally, the company has slipped to third behind GM and Volkswagon.
For years Toyota was able to sell higher prices cars in the US because they were seen as more reliable and got better gas mileage. How times have changed
For decades, Toyota’s strength was reliability. Other cars may have been flashier or cheaper, but Toyotas were high-quality and retained their value. Then Toyota recalled 14 million cars and trucks last year because of faulty gas pedals and other problems.
In a J.D. Power and Associates study of vehicle quality, it slipped to sixth place in 2010 from third place in 2009. The study measures problems experienced by the original owners of vehicles after three years.
It has moved up one slot this year, to fifth, but drivers are willing to try other brands.
“You’re getting acceptable levels of quality, reliability and dependability from pretty much every manufacturer,” said Jack Nerad, editorial director of Kelley Blue Book. “That takes a big arrow out of Toyota’s quiver.”
Toyotas are also not holding their resale value as well as they did before the recalls. For the 2011 model year, Kelley Blue Book predicts that all Toyota brands will be worth an average of 39 percent of their purchase price after five years. In the 2009 model year, Toyotas were expected to hold 47 percent of their value after five years
As for gas mileage, F has introduced a line of vehicles for 2011 and 2012 that trump TM is every category. In the luxury category, Mercedes overtook TM’s Lexus as the top selling luxury vehicle in Q1.
When you add those facts to the reality that TM is still selling above market rate vehicles, it is easy to see how their share has slipped in the US (and will continue to slide).
- TM says it can’t make money exporting its compact cars at exchange rates below 90 yen/dollar. The Yen went for an average of 82 yen to the dollar in Q1, compared with 91 yen last year. Toyota finance chief Satoshi Ozawa said. “We’ve reached the limits of [profitable] Japan-based manufacturing at ¥80 to the dollar.”
- >50% of vehicles produced in Japan are exported. Honda (HMC) and Nissan only produce ~28% of their vehicles in Japan)
- TM’s profits in Q1 fell 77% YOY
- They refused to give any guidance for Q2 and the remainder of the year (to my knowledge, they have not done this before)
- Due to the earthquake in Japan, TM is suffering large scale parts shortages and production disruptions. TM says they should be back to 70% of production capacity by June….. I don’t believe it. Why? Japan has ordered manufacturers to cut back electricity use by 15%-25% this summer.
- TM's market share in Japan fell from 50% in q1 FY11 to 44% in Q4 FY11 (year ending 3/31/2011). This is down from a high of 51% in Q3 FY10. Even the Japanese aren’t buying Toyota’s like they used to
Recently Efraim Levy, auto analyst at Standard and Poor’s wrote, “We believe TM’s premium valuation to peers is warranted by consistent and above-average profitability, large market share, and what we view as its strong balance sheet.” Efraim’s 12 month price target in April for shares of TM was $85.
While Levy is right, TM does have a strong balance sheet but it is a balance sheet that has been continually weakening over the past year and its cash and equivalents position last reported 3/31 is the lowest its been since 2009. Look for that weakening to continue even more when Q2 is reported. I also expect that profitability Levy speaks of to take a serious hit for the reason all cited above. TM should report a loss from operations in Q1 FY 2012 in August. In fact if you look at the reasons Levy cited above for liking TM and giving it a price target $2 over todays prices, all three at TM are in decline.
So, lets go to valuation, here are the current TTM PE’s for the major auto makers:
- Nissan 23.07
- Toyota 21.5
- Honda 10.41
- Ford 9.60
- GM 5.56
Now, with every major metric for TM in decline for two consecutive quarters (and three and four not looking any better), production and parts shortages, currency exchange issues and faced with the prospect of spending hundreds of millions to move production out of Japan, why does TM deserve a premium to other automakers who are seeing the precise opposite situation?
Both Ford and GM posted impressive Q1 results recently (F had its best quarter in years), are taking market share from TM and have vehicles that sport better quality ratings and fuel mileage (they are cheaper too).
One can’t even call TM a “value trap” as its shares are so over priced compared with the industry, even value investors can’t be interested. Given the headwinds, growth investors can’t be interested as there is very little chance TM grows earnings in the current year over last at all much less in an amount to justify a valuation 2X the industry. Meanwhile we expect both F and GM to handily top last year's numbers.
So, who is buying TM shares? The only thing I can come up with is folks who are due some aggravation down the road.
I am going to short TM.
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.