This Carmaker Is Ready to Turn the Corner

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The recent past of the Japanese auto giant, Toyota (NYSE: TM), hasn’t been a smooth one as the company tried to cope with financial troubles, economic troubles, as well as supply chain difficulties because of a natural calamity. The company reported its biggest ever loss, suffered due to a strong Yen, the devastating Japan earthquake and the Thailand flood caused heavy and lasting damage to the company, and the car maker was surrounded by lawsuits and penalty payments related to vehicle defects and recalls.

Since 2010, Toyota has paid fines four times with the latest paid in the last month to settle allegations by the NHTSA that amounted to a whopping $17.4 million. And now, the car maker has agreed to part with another monstrous sum of $1.1 billion in order to settle a lawsuit brought by the Toyota users who have lost value on their cars due to recalls by the company. DailyFinance reports:

“The courtroom claims began with a highway tragedy. A California Highway Patrol officer and three of his family members were killed in suburban San Diego in 2009 after their car, a Toyota-built Lexus, reached speeds of more than 120 mph, hit an SUV, launched off an embankment, rolled several times, and burst into flames.”

As a result of this accident and numerous complaints about sudden unintended acceleration in many of Toyota’s cars and several reports of other accidents, the car maker recalled as many as 14 million vehicles for inspection and repair, if required. However, Toyota found no fault with its electronic throttle control system and nor did the NHTSA or NASA. Toyota blamed the drivers and identified faulty floor mats and faulty accelerator pedals as the cause of the accidents. Still, several owners claimed that they suffered substantial loss of value on their vehicles because of the recalls. These owners initiated the lawsuit represented by Steve Berman which is being judged by the U.S. District Judge James Selan.

The entire lawsuit has two parts – one dealing with loss of value on cars due to recalls and the other deals with injury and death of Toyota users due to accidents. The current settlement of $1.1 billion addresses the first aspect of the case only. Stephen Harner, through his article on Forbes, voices his opinion on the matter. He feels this is the most egregious and outrageous lawsuit.

What makes the claim so outrageous and unjust is that damage, if any, would not have been caused by real defects in Toyota cars, but by the politicized, likely government and competitor-stoked, anti-Toyota media feeding frenzy that sensationalized, exaggerated, and distorted (or concocted) stories of “sudden acceleration”.

Though Toyota feels it isn’t at fault, it agreed to the $1.1 billion settlement in order to end the four-year long fight and also the continued dispute with NHTSA. The car maker wants to end this old chapter and focus on the future. The move on Toyota’s part is actually good for the company’s future. This way the consumers will feel that the company is ready to stand behind each car it makes and is taking the responsibility for its products. However, despite its indirect benefits, this is surely going to take a toll on the bottom line of the car maker in 2013. But, I feel that should not be a reason for Toyota shareholders to be disappointed and exit the stock.

The Japanese car giant is on its recovery path and is doing pretty well. Whereas its peers are struggling to meet the analyst estimates, Toyota is doing a remarkable job of beating the estimates. According to The New York Times,

Toyota’s rebound has been centered in the United States, where its sales increased 28.8 percent last year to 1.88 million vehicles through November. That’s more than double the industry wide increase of 13.9 percent over the same period. The biggest contributors have been stalwart products such as the Camry, and the expanded line of Prius hybrid models. Through November, combined sales of Prius cars had risen 81.3 percent in 2012, as the company continued to dominate the hybrid segment. ”

Again, the company expects to sell as many as 9.7 million vehicles in 2012 and aims at selling 9.91 million vehicles in 2013. If the expected top-line for 2013 is met, the company will jump back to the top spot in terms of worldwide sales, surpassing GM that currently rests in the ace position. The fact that the company’s sales are improving with time is a living proof that the consumers are not against the company.

2012 was not the best year for the car market. While Toyota called back almost 5 million vehicles, Honda (NYSE: HMC) called back as many as 3.4 million vehicles, General Motors (NYSE: GM) called back 1.3 million vehicles and Ford (NYSE: F) called back 1.1 million vehicles. However, these call backs did not harm the prospects of the space at all. During the year, Toyota increased its market share by 17% and Honda’s increased by a strong 25%. These two Japanese automakers specially did well even though their sales are tumbling in China. GM and Ford have been benefiting from China’s anti-Japan protest and thus increase in their market share has been natural.

On a comparative basis, Toyota has outperformed its peers on several areas and in the future also it is going to continue with the same trend. This year, Toyota has shown the maximum growth in its earnings and in the coming 5 years analysts are expecting the company to grow its earnings by more than 55%. The following chart explains:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><a href="">Toyota</a></p> </td> <td> <p><a href="">Honda</a></p> </td> <td> <p><a href="">Ford</a></p> </td> <td> <p><a href="">GM</a></p> </td> </tr> <tr> <td> <p>Earnings growth (this year)</p> </td> <td> <p>188.78%</p> </td> <td> <p>88.45%</p> </td> <td> <p>-11.14%</p> </td> <td> <p>-17.59%</p> </td> </tr> <tr> <td> <p>Earnings growth (next 5 years)</p> </td> <td> <p>55.42%</p> </td> <td> <p>33.93%</p> </td> <td> <p>5.93%</p> </td> <td> <p>13.30%</p> </td> </tr> </tbody> </table>

(Source: CNN Money; January 3, 2013)

Now, looking at the stock performance of Toyota in comparison to Honda, Ford and GM, Toyota has outperformed its peers with a 41.62% increase in its price in the past 1 year, whereas Honda recorded a 22.4% rise, Ford recorded an 18.6% rise, and GM recorded a 38.38% rise.

<img src="/media/images/user_13114/t-vs-hm-f-gm_large.jpg" />

(Source: CNN Money; January 3, 2013)

In comparison to the S&P 500 and the Nasdaq also, Toyota has done very well. For the majority of the past 12 months, the car maker has been beating the markets.

<img src="/media/images/user_13114/toyota-vs-index-past-5-years_large.jpg" />

(Source: CNN Money; January 3, 2013)

The company’s performance and the stock’s performance have been praiseworthy. Despite weak economic circumstances, Toyota has managed to bag brilliant sales and is looking at increasing them further in 2013. Management at Toyota is on its toes and is taking all necessary steps to put its top-line and bottom-line further in the green. All in all, Toyota is looking pretty attractive to me. Though the $1.1 billion settlement is going to cast a short dark cloud on the company’s bottom-line, Toyota will survive and may soon claim back its position as the top auto maker of the world.


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