This Carmaker Expects Record Sales

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Periods of economic downturn are generally unfavorable for carmakers, as they make expensive, often luxury products. As such, many car producers have been having a rather hard time in the last few years as sales have slowed across the world. A few automobile manufacturers, however, have managed to thrive in this environment, and increase sales as well as revenue. One of these manufacturers is Toyota (NYSE: TM), which expects to set record car sales this year despite the grim macro-economic backdrop.


Japanese carmaker Toyota Motors, with a market cap of over $130 billion dollars, was founded in 1933. Since then it has become the world’s largest automobile brand, recently having reclaimed its top spot from US competitor GM (NYSE: GM). Toyota sold about 450,000 more cars than its main American rival this year, and saw sales rise over 28%, compared to GM’s 2.5% rise. Toyota’s automobile division is good for the lion's share of revenue, but the company is also active in financial services, as well as the production of pre-fab housing. In the last twelve months, Toyota stock is up about 15.6%, and has a surprisingly low beta of .73.

Record Sales

Despite a plunge in Chinese sales this year, largely due to a territorial dispute between Japan and China over a number of islands, Toyota is set to beat its 2007 record of 9.37 million vehicles sold this year. Some analysts argue, however, that the weakness in China is also to be blamed on Toyota misreading its market, specifically price-conscious buyers in the budget segment. Nevertheless, soft sales in China will be more than compensated by strong performance in other Asian regions, such as Thailand and India.

These results are particularly impressive in comparison with those of US competitor Ford (NYSE: F), whose sales are expected to trail the market by 5-6%. This beaten-down American car manufacturer, which has seen its stock drop over 14% in the last year, is still struggling with sales, especially in Europe. This is partly due to Ford’s inability to keep up with demand, but its closing of its Belgium plant does little to inspire confidence in the firm’s ability to keep up with European competition from the likes of Volkswagen.

Earnings and Outlook

Q3 2012 earnings came in at $0.33, beating the expectations of the sole analyst covering Toyota by about 30%. The outlook for the first quarter of 2013 is encouraging. The company expects revenue to grow by 18.4% year over year, and a huge rise in net profit of 168% year over year. The firm’s operating margin has been steadily increasing since hitting a low in 2008, and is now around 6.4%. Sales expectations are especially high in Asia, with an expected increase of about 34.1%.

Fundamentals and Metrics

Toyota’s fundamentals and metrics are decent. The P/E stands at 16.7x earnings, which is higher than the very low industry average of 10.63x, but the price to book is only 0.93. For comparison, GM trades at 8.3x earnings, and Ford at a worryingly low 2.3x earnings.

Toyota’s forward dividend yield is about 1.8%, which is sustained by a payout ratio of only 26%. Return on equity isn’t particularly encouraging at 6.3%, but the stock still looks cheap priced at only 0.47 to sales. This is not a stock that I would necessarily buy on fundamentals at the moment, but rather on its strong sales and outlook.

<img src="/media/images/user_13498/tm1a_large.png" />


Despite very challenging macro-economic conditions, which leave consumers with less and less money to spend, Toyota is managing to stay convincingly ahead of its competition. Setting record sales this year, and having reclaimed its position as world leader in the industry, things are looking pretty good for the Japanese firm. Moreover, the outlook for 2013 is solid, with sales increases in every region. This is very impressive considering the state of the car industry today. Fundamentals are looking a bit mixed at the moment, but I would still consider Toyota a good bet going into 2013.  

The Big Picture

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus