Toyota Motors (TM) is one of the world's leading auto manufacturers with operations in five continents. The fact that the company's operations have strengthened in North America has not managed to cheer up investors given that the anti-Japan protests in China forced Japanese auto manufacturers to cut their production by more than half for the current time period. Europe's debt crisis is also a source of headwinds for the company.
We think that these issues have been priced in the stock, and TM is ready to fly with its bellwether Corolla and other top models.
Following shows the geographical bifurcation of revenues.
At its home, Toyota enjoys a healthy market share of 47%. Domestic sales for September turned out to be -8.1%, with a rising trend towards mini-vehicles. Domestic sales fell mainly because of eco-car subsidies coming to an end. Although the sales of the Prius were up, they were more than offset by declining sales of the Corolla.
In an interesting comparison between Japanese and Korean brands, Morgan Stanley concluded that the J3 - Toyota, Honda (HMC) and Nissan (OTCPK:NSANY) - still lead in brand perception. However, the K2 - Hyundai and Kia - have gained a market share through aggressive designs and good value for money product offerings. It is important to note that the J3 have come strong against the unprecedented strength of the Yen, massive recalls, and the tsunami last year. Also, the J3 are trading at cheaper valuations as compared to the K2. Both P/E and P/B for the J3 are below historical average levels.
The Japanese market's future seems bright, especially in the short-term. For the long-term, even though the Street prefers the K2 over the J3, it still believes that the J3 will perform well, given their cheap valuations and especially if they are able to improve their plant utilization rates, something the K2 are far superior at doing.
Toyota was an absolute success story in the September's SAAR review. It not only gained a market share YoY, but also had the largest rise of 41% in YoY sales. Ford (F) and General Motors (GM) lost market share in September.
U.S. September sales turned out to be a big surprise, as the 14.9 million figure surpassed estimates of 14.5 million by a huge margin. The U.S. market seems to have a promising future, given that the current hike in demand is because of pent up demand, more inclination towards small and fuel-efficient cars, and cheaper access to credit. However, it is important that one does not get carried away with the 40% YoY rise, as it is only so high given last year's tsunami.
Toyota's cars also made it into the top ten most sold cars in the U.S. With gasoline prices hovering around $4, high sales figures for the Prius were not a surprise. Toyota's sales surge was also driven by sub-$200 monthly lease deals on the Toyota Camry. The company plans to bring in more aggressive tactics to conquer the same market that it once lead at its peak in 2009. A strong credit rating will also help Toyota finance its deals cheaply.
The figures clearly portray that Japanese manufacturers have been successful, to some extent, in improving their conquest rates (attracting competitors' customers) over the Detroit 3 (GM, Ford and Chrysler).
Source: Automotive News
Investors were glad to know that most of the rise in demand was not because of incentives only, as Toyota's incentives averaged 7% of the transaction price, which was lower than the industry norm of 8.2%.
The fall in the Chinese market has already been discussed in our article on the anti-Japan protests. To summarize, Toyota gets 15% of its revenues from China. This year, Toyota planned to sell one million cars in China. However, the anti-Japan sentiment that has swept the country, after the row over the Senkaku/Diaoyu islands, has made this target almost impossible. Toyota sold only 44,000 cars this September, 48.9% less than a year earlier (86,000). It has been forced to cut back its production, which might extend through November.
The scale and duration of the Chinese boycott of Japanese cars is hard to estimate, but Credit Suisse's analyst believes that the market has already factored in the risk of capacity utilization remaining at 30% for the next twelve months. Therefore, a release of tension amongst the two Asian economies will definitely push the stock up.
The fact that most of the bad news has already been incorporated in the stock makes Toyota an attractive buy. Toyota has topped three of its last four earnings estimates. Last quarter's earnings were 14% higher than the street's consensus estimates. The stock is trading at a forward multiple of 9x. After the Chinese protests, EPS estimates have been brought down from $7.23 to $7.05.
Before Toyota's sales were hit in China, the stock was trading at $86. In case the issue gets resolved earlier than the market expectations, a 15% upside is expected in the stock (Currently, the stock is trading near $75). The current sell side bullish target price for the stock is $92.
Given the solid performance in the U.S., the priced in adversity of China news, and fuel-efficient models like the Prius, Toyota is recommended as a buy.