The Turnaround Story That Is Toyota

Sep.26.12 | About: Toyota Motor (TM)

It is amazing, at times, the difference a few short years makes in the fortunes if a company. The most interesting (and profitable for investors) are those companies, once successful, which seem headed for the corporate graveyard, before rebounding and going on to succeed once again. The most obvious example of this phenomena is, of course, Apple.

But there is another company, while not as spectacular as Apple, that is also staging a rather remarkable rebound from misfortunes in recent years. That company is Japanese automaker Toyota Motor (NYSE:TM), and it is hard to believe, but just three years ago it looked to be "on the brink of irrelevance" according to the grandson of the company's founder. In the year ending in March 2009, Toyota had suffered a net loss of approximately $4.6 billion. This was its first year without a profit in sixty years.

And the problems didn't end there. The company was soon battered by an unprecedented crisis surrounding the safety of their vehicles, requiring the recall of more than 10 million of their cars in 2009/10. Then in 2011, Toyota faced serious supply chain disruptions thanks to Japan's devastating earthquake and huge floods in Thailand.

No surprise then that by the end of 2011, Toyota's stock price had collapsed by about 70 percent from its early-2007 peak. Nor was it a shock that both General Motors and Volkswagen had overtaken the company in the number of vehicles sold.

But what has been surprising to many in the industry and investors alike has been Toyota's remarkable rebound from its lows. In spite of a strong yen and a weak global economy, last month Toyota reported the highest quarterly profit in four years - $3.7 billion. In the first half of 2012, the company also recaptured the top spot in sales, delivering 4.87 million vehicles, and is currently on pace for a record annual output of vehicles.

There are several factors behind Toyota's turnaround including a strong North American auto market and subsidies by the Japanese government for fuel-efficient cars. But foremost among them is the company's focus on relentless cost-cutting. Among the measures taken, Toyota has standardized more parts and pushed its suppliers to slash prices while forcing its own management to take wage cuts and smaller bonuses. All totaled, the company has managed to lower its total expenditures nearly 25 percent from fiscal 2007 levels.

Of course, the turnaround is not yet complete. Toyota's forecast full-year net profit is less than half the amount it earned before the 2008-09 financial crisis. It also faces rivals that are much better able to compete with Toyota in quality terms including South Korea's Hyundai Motor Company and a revitalized Chrysler (thanks to Fiat), Ford and GM. So Toyota's fight to surpass its previous glories is far from Apple's level yet.

But the company may be worth a look from investors as its stock is already up nearly a third from its lows in late 2011 and may be poised for more growth in the months and years ahead.

In addition, the company's fate may also affect shareholders in the automotive ETFs, such as the Global X Auto ETF (VROM). It is the largest position in the fund, at nearly 12%, making up nearly half of the fund's overall Japanese weighting of 25.72%. Toyota's strongest competitor, Hyandai Motor, is the fourth largest position in the fund, at nearly 6%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.