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Time to Make a Bet in the Leading Automaker of the World?

February 20, 2014 | About:

On Dec. 31, Donald Smith (Trades, Portfolio) added Toyota Motor Corporation (TM) at an average price between $118.61 and $131.65 and currently holds 440,684 shares of the stock with a current value of $50 million in his portfolio. It was the second time he made a move in this stock, in June he reduced the position and at the end of the year he increased it. So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.

Geographic Progress

The company is engaged in the design, manufacture, and sale of sedans, minivans, compact cars, sport-utility vehicles, trucks and related parts and accessories throughout the world. Toyota’s principal business segments are automotive operations, financial services operations and other operations. The company sells its vehicles in approximately 170 countries and regions, and markets for its automobiles in Japan, North America, Europe and Asia.

The company´s focus is to boost its sales on the emerging markets (specifically Asia) with the introduction of eight compact car models into Brazil, China, India and Indonesia by 2015. At that time, the company wants to sell more than 1 million vehicles in over 100 countries. Toyota's manufacturing expertise will be implemented in those countries, searching for low costs. We have to mention that it is planning to double its production capacity in Russia and production capacity in Argentine.

R&D Efforts

The company has concentrated on a plan to launch a fuel cell vehicle, which runs on hydrogen to produce electricity, by 2015. At that time it also plans to launch 21 gas-electric hybrid models. Another contribution to the company´s strategy is to give more power to regional design centers in order to make cars for specifics markets.

Analyst Recommendation

Its fourth-quarter 2013 earnings per share surpassed the Zacks Consensus Estimate. The firm is currently Zacks Rank # 3 - Hold, and it also has a longer-term recommendation of “Neutral”

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 10.1x, trading at a discount compared to an average of 15.6x for the industry. To use another metric, its price-to-book ratio of 1.3x indicates also a discount versus the industry average of 1.42x and the price-to-sales ratio of 0.8x is above the industry average of 0.6x. The first two metrics indicate that the stock is relatively undervalued relative to its peers.

Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago. It has demonstrated a positive trend over the past five years. In the next graph we include the stock price because EPS often lead the stock price movement.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to its ROE from the same quarter one year prior. Let´s compare it with competitors in the next table:

Ticker

Company Name

ROE (%)

TM

Toyota

7,9

F

Ford

35,5

HMC

Honda Motor

7,3

As we can see, Honda Motor Co (HMC) has a lower ROE than Toyota. But for those seeking for a great ROE, the option should be Ford (F).

Final Comment

The firm´s revenues rose more than 14% from the same quarter one year prior. This growth seems to boost the EPS as we have seen. Moreover, Net income and net operating cash flow increased as well, demonstrating the improvement of the company´s strength.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Louis Moore Bacon (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Jim Simons (Trades, Portfolio), John Rogers (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have also invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


Rating: 4.2/5 (5 votes)

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