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I Think My Next Car Will Be Toyota

August 05, 2014 | About:

In this article, let's take a look at Toyota Motor Corporation (NYSE:TM), a $187.21 billion market cap company, which is one of the world's largest automobile producers.

Cost Efficiencies

The president of the company, Mr. Akio Toyoda, focuses on cost efficiencies under its Toyota New Global Architecture (TNGA), which seeks to make various vehicles at the same time using large amounts of common parts. The first cars under this project will be in 2015 and will first focus on three front-wheel-drive platforms. The goal is to have 70%-80% of common parts, but first it will start at 20% or 30%. Although this could increase the risk of defective parts, these changes are necessary to keep pace with other major common platform. With this money, Toyota can reinvest the savings into new technology and design.

International Focus

Toyota will maintain its strategy so as to retain its market leadership. The company plans several actions, like introducing new cars or remodeling existing ones and increasing marketing campaigns. Also, it will focus on the correct use of technology to enhance customer loyalty and brand image.

In a weak dollar environment, plants outside Japan will also help to deal with currency risk. Apart from a weak dollar, a slowly recovering global demand for light vehicles could create a difficult environment as well.

In 2013, about 77% of Toyota's vehicle sales were outside Japan, with 9.8 million units sold, and 58% of production was based outside the country. In FY 14 (Mar.), 33% of consolidated revenue and 26% of unit sales were generated in Japan. Toyota's goal is to consistently achieve market share of 40% (at least) in Japan. Market share in Japan is 47%, while in the U.S. it is around 14%.

Toyota's manufacturing expertise will be implemented in countries, such as Brazil, China, India and Indonesia. This will help the negative effects of a weak dollar that we have seen before. Further, Toyota´s strategy is to give more power to regional design centers which know the specific markets.

Payment History

Since 1970, Ralph has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Although the current dividend yield is not too high, it can improve in the future allowing higher shareholder´s returns.

Revenues, Margins and Profitability

Looking at profitability, revenue growth by 44.14% led earnings per share increased in the most recent quarter compared to the samequarter a year ago by 16.8% ($2.02 vs $1.73). During the past fiscal year, it increased its bottom line by earning $11.17 versus $6.46 in the prior year. This year, Wall Street expects an improvement in earnings ($12.60 versus $11.17).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.



ROE (%)





Ford Motor Co.



General Motors Co.



Honda Motor Co.



Industry Median


The company has a current ROE of 12.6% which is higher than the one exhibited by Honda Motor Co. (NYSE:HMC) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher levels of ROE, General Motors Co. (NYSE:GM) could be the option. Ford (NYSE:F) even has a much higher ratio. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.


Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 10.6x, trading at a discount compared to an average of 16.9x for the industry. To use another metric, its price-to-book ratio of 1.3x indicates a discount versus the industry average of 1.57x while the price-to-sales ratio of 0.75x is above the industry average of 0.69x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $14,943, which represents a 8.4% compound annual growth rate (CAGR).


Final Comment

Toyota is the world's largest automaker in calendar 2013. The Japan-based company is the leading automaker in the world in terms of sales and production after the loss in reputation due to a series of safety recalls. The management focuses on global operations with regional strategies. Further, key initiatives such as improving efficiency and expanding operations are efforts that soon will be rewarded.

Moreover, the stock's relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like David Dreman (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Donald Smith (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Jim Simons (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Charles Brandes (Trades, Portfolio) and John Rogers (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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