A Value Stock Entering the Battery Game

The race to be the leader in electric vehicle production by 2020 has several suitors taking different approaches. Panasonic (PCRFY, Financial) has been the expert up until this point in lithium ion battery production for vehicle usage, but Toyota (TM, Financial) is also putting its hat in the game.

First, the tale of the tape for Toyota:

Toyota is trading in a similar range to other vehicle manufacturers in the world with both a low book value and a low price-earnings (P/E) ratio combined with high dividend yields:

• Price-book (P/B): 1.14X.
• P/E: 8.48X.
• TTM Div. Yield: 3.15%.

Other positive balance sheet aspects of Toyota’s operations include:

• An increase in cash and short-term investments from 2.94 trillion yen ($28 billion) to 5.48 trillion yen from 2012 to 2016.
• Buyback increases year over year from fiscal years 2012 to 2016 (from 1.14 trillion yen in 2012 to 1.6 trillion yen in 2016).
• Retained earnings increases year over year from fiscal years 2012 to 2016 (from 11.92 trillion yen in 2012 to 16.79 trillion yen in 2016).

Toyota is also forming joint ventures to develop hybrid/electric lithium battery technologies for themselves and other firms. The following is sourced from the 2016 Toyota 10K:

“In 2011, Toyota and BMW (FRA:BMW, Financial)Group agreed to conduct collaborative research in the field of next­-generation lithium­-ion battery technologies and for BMW to supply diesel engines to Toyota Motor Europe, Toyota’s European subsidiary. In 2013, as part of their strategic long-­term cooperation in the field of sustainable mobility, Toyota and BMW Group entered into agreements for the joint development of a fuel cell system, joint development of architecture and components for sports vehicles and joint research and development of lightweight technologies. The two companies also agreed to commence collaborative research on lithium-­air batteries, a post-­lithium­ battery solution, marking the second phase of collaborative research into next­-generation lithium-­ion battery cells.” – Toyota 2016 10K

“Toyota and Mazda (MZDAY, Financial) have been engaged in collaboration such as the licensing of Toyota’s hybrid technologies to Mazda and the production of compact cars for Toyota at Mazda’s plant in Mexico.” – Toyota 2016 10K

This is all in anticipation of the regulation changes that will affect every vehicle manufacturer in the world within five years or so. In the most stringent of states regarding emissions regulations, California has estimated by 2025 that approximately 15% of the new vehicles sold in the state would be zero emission or plug­in hybrid vehicles.

In response,Toyota is entering the manufacturing/supply side of the game (as Tesla [TSLA] and others are):

“To enhance production capacity of auto parts, Toyota constructed a plant for hybrid vehicle battery production in China in September 2015 and a plant for passenger vehicle engine production in Indonesia and Brazil in February 2016.” – Toyota 2016 10K

The race to be the battery king is also setting off a slew of mining operations pertaining to lithium. One of the best experts on the subject would have to be Peter Secker of Bacanora Minerals (TSXV:BCN, Financial). If you have the time to watch one of his 20- to 30-minute presentations on YouTube, you will be much more informed for doing so and have a better idea of the market supply chain for lithium carbonate, hydroxide and lithium ion end users.

If we look at current end users of lithium and suppliers of batteries for vehicle and other electronic usage, we will see that Panasonic, BYD (BYDDF, Financial) and Samsung (XKRX:000830, Financial) are the current market leaders. The only vehicle manufacturer on the supply side of the game is Tesla, but with Toyota already having a profitable business and possibly being able to significantly reduce its forward cost of goods sold, this seems like a prescient business model that could expand the marketing mix and margins for Toyota in the future.

Disclosure: The author is long Panasonic. The author has no positions in Toyota, BYD, Samasung, Bacanora, BMW, Mazda.

Start a free seven-day trial of Premium Membership to GuruFocus.