Toyota Industries Trades At Massive Discount - And Maybe Always Will

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About: Toyota Industries Corporation (TYIDF), Includes: TM
by: Holmes Osborne
Summary

Toyota Industries is the largest forklift manufacturer in the world.

Industries and Toyota Motors have enormous cross-holdings in each other.

Industries manufactures the Rav4 and Yaris.

The stock trades at about a 60% discount from the value of the business and its investment portfolio.

Toyota Industries (OTCPK:TYIDF) is the original Toyota. The Motor (TM) division was spun off many decades ago. Industries is the number one forklift manufacturer in the world, manufactures air conditioners for autos, produces the Rav4 and Yaris, and has a massive portfolio of stocks. The stock is trading at about a 60% discount if you put a price to earnings ratio of 11 on its business. The problem is that there is no catalyst to extract this value as the company is not going to liquidate its investment portfolio.

The stock trades for ¥5,730, there are 326 million shares, and the market cap is ¥1.87 trillion. Earnings were 491.96 and the price to earnings ratio is 11.6. The dividend is ¥155 and the dividend yield is 2.7%. So far, the stock looks pretty cheap.

Sales have been flat. Revenues were ¥2.17 trillion in 2015 and fell slightly to ¥2 trillion in 2018. The fiscal year ends in March. Earnings rose from ¥115 billion to ¥168 billion so management has done a great job controlling expenses. In the most recent fiscal year, sales were ¥2.2 trillion and income was ¥152 billion. Operating profit margins were 6.1% last year.

The balance sheet is amazing. There is ¥461 billion in cash, ¥845 billion in receivables, and ¥2.25 trillion in holdings of other companies. The liability side shows ¥506 billion in payables and ¥1.3 trillion in debt. Moody’s ranks Industry’s debt as A1. A little stingy in my opinion. Aaa is Moody’s highest rating which is what Industries should get in my opinion. The rating agencies don’t give enough credit for investment portfolios.

28% of revenues are auto parts, 65% fork lifts, and 3.3% textile. 15% of all sales are air conditioners. 3.7% are cars—Rav4 and Yaris. Toyota Motors is striving to use 80% of the same parts in all of its autos. It will be interesting to see how this affects Industries.

Management has a goal of reaching ¥4 trillion in sales by 2030. It’s just a goal—kind of like a football team winning the Super Bowl. Industries had a goal in 2011 of reaching ¥3 trillion in sales by 2020 but it’s not going to happen.

Industries owns 7.79% of Toyota Motors and Toyota Motors owns 25% of Industries. So the value of what Industries owns in Motors is $13.3 billion, or ¥1.58 trillion. Motor’s stock has traded sideways for about six years.

The material handling division is the largest manufacturer of forklifts in the world. The division makes many other products such as driverless material handlers used in airports and manufacturing.

Morgan Stanley has a target price of ¥6,700. ¥3,190 of that is predicated upon the firm trading at 11 times earnings of ¥290. The second part of the estimate is that the investment portfolio is worth ¥5,880 but because it is illiquid, they analyst assigns a 50% discount. Imagine what the stock would be worth if it sold its investment portfolio? ¥5,880 plus ¥3,190 equals ¥9,070. That would be a 58% appreciation!

My fear on autos is that there has been an uptick in delinquencies for borrowers. Credit scores below 620 accounted for 20.1% of the total for the first quarter, up from 18.9% a year ago. The range of 620 to 659 accounted for 12.2% of the total, up from 11.5%. Serious delinquencies, defined by the New York Fed as 90 or more days late, accounted for 4.69% of the outstanding overall automotive balance in the first quarter, up from 4.26% a year ago. If credit dries up, auto sales drop. If auto sales drop, parts manufacturers like Industry will take a hit too.

We owned the stock about fifteen years ago. It doubled, then it subsequently fell back to where we bought it. Then the financial crisis occurred and we sold, breaking even. When Marty Whitman (TAVFX) of Third Avenue was alive, he wrote extensively on Toyota Industries. You can see why. The stock is trading at a massive discount. I was the last and only person to write on Industries on Seeking Alpha. That was four years ago.

Is Industries a buy? Well, Industries has been trading at a massive discount for a long time and the price hasn’t been affected. So we’re not going to buy. The stock isn't widely covered in the U.S. but still, it's no secret that's it's trading at a big discount to NAV. If we were bullish on Toyota Motors, yes, we’d buy. But we’re concerned about the credit markets and slowing auto sales.

Disclosure: I am/we are long TAVFX. 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.