I can see why people buy shares of highly valued companies like Netflix (NFLX, Financial) and Amazon (AMZN, Financial). 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 Netflix because I think Amazon, Google (GOOG, Financial) 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, Financial). Remember, they are an automaker.
Two years ago Toyota was the leader in the auto world taking over for a then struggling General Motors (GM, Financial) and Ford (F, Financial). Since then its U.S. market share has slipped 17%, and they now trail GM and are in a close race with Ford for second. Globally, they have slipped to third behind GM and Volkswagen (VLKAY).
For years, Toyota was able to sell higher priced cars in the U.S. because they were seen as more reliable and got better gas mileage. How times have changed.
From the AP.
For decades, Toyota’s strength was reliability. Other cars may have been flashier or cheaper, but Toyota's 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, Ford has introduced a line of vehicles for 2011 and 2012 that trump Toyota in every category. In the luxury category, Mercedes overtook Toyota’s Lexus as the top selling luxury vehicle in the first quarter.
When you add those facts to the reality that Toyota is still selling above market-rate vehicles, it is easy to see how their share has slipped in the U.S. (and will continue to slide).
Other problems:
While Levy is right, Toyota does have a strong balance sheet, but it is a balance sheet that has been continually weakening over the past year. In addition, its cash and equivalents position last reported March 31 is the lowest it’s been since 2009. Look for that weakening to continue even more when second quarter financial results are reported. I also expect that profitability Levy speaks of to take a serious hit for the reasons all cited above. Toyota should report a loss from operation in the first quarter of FY 2012 when they report it in August. In fact if you look at the reasons Levy cited above for liking Toyota and giving it a price target $2 over today's prices, all three at Toyota are in decline.
So, let’s go to valuation, here are the current TTM PE’s for the major auto makers:
Now, with every major metric for Toyota 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 Toyota deserve a premium to other automakers who are seeing the precise opposite situation?
Both Ford and GM posted impressive first-quarter results recently (Ford had its best quarter in years), are taking market share from Toyota, and have vehicles that sport better quality ratings and fuel mileage (they are cheaper too).
One can’t even call Toyota a “value trap,” as its shares are so over priced compared to its industry that even value investors can’t be interested in them. Given the headwinds, growth investors can’t be interested as there is very little chance Toyota will grow earnings in the current year over last at all much less in an amount to justify a valuation 2 times the industry. Meanwhile, we expect both Ford and GM to handily top last year’s numbers.
So, who is buying Toyota shares? The only people I can up with is folks who are due some aggravation down the road.
Now to Toyota (TM, Financial). Remember, they are an automaker.
Two years ago Toyota was the leader in the auto world taking over for a then struggling General Motors (GM, Financial) and Ford (F, Financial). Since then its U.S. market share has slipped 17%, and they now trail GM and are in a close race with Ford for second. Globally, they have slipped to third behind GM and Volkswagen (VLKAY).
For years, Toyota was able to sell higher priced cars in the U.S. because they were seen as more reliable and got better gas mileage. How times have changed.
From the AP.
For decades, Toyota’s strength was reliability. Other cars may have been flashier or cheaper, but Toyota's 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, Ford has introduced a line of vehicles for 2011 and 2012 that trump Toyota in every category. In the luxury category, Mercedes overtook Toyota’s Lexus as the top selling luxury vehicle in the first quarter.
When you add those facts to the reality that Toyota is still selling above market-rate vehicles, it is easy to see how their share has slipped in the U.S. (and will continue to slide).
Other problems:
- Toyota 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/dollar in quarter one, 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, Financial) and Nissan only produce ~28% of their vehicles in Japan)
- Toyota’s profits in the first quarter fell 77% YOY
- They refused to give any guidance for the second quarter and the remainder of the year (to my knowledge, they have not done this before)
- Due to the earthquake in Japan, Toyota is suffering large-scale parts shortages and production disruptions. Toyota says they should be back to 70% of production capacity by June … I don’t believe them. Why? Japan has ordered manufacturers to cut back electricity use by 15%-25% this summer.
- Toyota's market share in Japan fell from 50% in the first quarter of FY 2011 to 44% in the fourth quarter of FY 2011 (year ending March 31, 2011). This is down from a high of 51% in the third quarter of FY2010. Even the Japanese aren’t buying Toyotas like they used to
While Levy is right, Toyota does have a strong balance sheet, but it is a balance sheet that has been continually weakening over the past year. In addition, its cash and equivalents position last reported March 31 is the lowest it’s been since 2009. Look for that weakening to continue even more when second quarter financial results are reported. I also expect that profitability Levy speaks of to take a serious hit for the reasons all cited above. Toyota should report a loss from operation in the first quarter of FY 2012 when they report it in August. In fact if you look at the reasons Levy cited above for liking Toyota and giving it a price target $2 over today's prices, all three at Toyota are in decline.
So, let’s 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 Toyota 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 Toyota deserve a premium to other automakers who are seeing the precise opposite situation?
Both Ford and GM posted impressive first-quarter results recently (Ford had its best quarter in years), are taking market share from Toyota, and have vehicles that sport better quality ratings and fuel mileage (they are cheaper too).
One can’t even call Toyota a “value trap,” as its shares are so over priced compared to its industry that even value investors can’t be interested in them. Given the headwinds, growth investors can’t be interested as there is very little chance Toyota will grow earnings in the current year over last at all much less in an amount to justify a valuation 2 times the industry. Meanwhile, we expect both Ford and GM to handily top last year’s numbers.
So, who is buying Toyota shares? The only people I can up with is folks who are due some aggravation down the road.
