Is This Carmaker a Good Stock After a $1 Billion Settlement?

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

Toyota Motor Corporation (NYSE: TM) has agreed to pay $1.1 billion to settle the US class action lawsuit arising from the automobile recalls in 2009-2010, which came about because of the unintended acceleration in Toyota’s vehicles. Around 16 million vehicles with different brands, including Toyota, Lexus, and Scion, got safety updates and payments. Including the 2010 recall costs and decrease in sales, the total cost of this debacle is up more than $3.1 billion, including this settlement. How will the event affect this carmaker’s earnings? Should investors consider Toyota a possible investment after this all this?

Top Global Market Position

Toyota has emerged as one of the largest global automobile manufacturers. Its automotive products have been sold in around 170 countries and regions, with the majority of cars sold in Japan (more than 2 million units in fiscal 2012), generating revenue of nearly ¥7.3 trillion ($85.14 billion). The second biggest consumption area was North America, where more than 1.87 million were units sold, generating nearly ¥4.65 trillion ($54.23 billion) in sales. Asia is next on the list, with more than 1.32 million units sold, bringing to Toyota nearly ¥3.2 trillion ($37.32 billion) in revenue. In the first nine months of 2012, Toyota has kept its status as the world’s highest selling car maker, with sales of 7.4 million vehicles. General Motors (NYSE: GM) has sold more than 6.95 million vehicles during the same time. The third position belonged to Volkswagen Group (NASDAQOTH: VLKAY), with around 6.2 million units sold.

“Strong” Business Profile

In November 2012, S&P rated Toyota as having a “strong” business profile for several reasons. First, the company has a strong market position thanks to consistently reducing costs by around ¥300 billion ($3.5 billion) per year. Even with the Japanese earthquake in Mach 2011, it successfully sold 7.35 million vehicles globally in that year, along with the recovery in inventory and production levels. S&P expected that Toyota could regain market share in several key markets. Second, Toyota had “a strong capital structure and exceptional liquidity,” thus the financial risk was quite remote.

Decent Balance Sheet and Valued Most Expensive

Toyota had a decently leveraged balance sheet. As of September 2012, it got nearly ¥10.74 trillion ($125.26 billion) in total stockholders’ equity, more than ¥11.7 trillion ($136.5 billion) in both long and short term debt, and ¥3 trillion ($35 billion) in cash. In fiscal 2012, Toyota generated nearly ¥284 billion ($3.31 billion). This Japanese automaker forecasted its net income to ¥780 billion ($9.1 billion). According to Toyota, the $1.1 billion will be charged to this quarterly earnings; thus the expected net income would be around $8 billion, more or less. With the current share price of $91.84, the total value of Toyota is around $145.42 billion. This means that the net income of $8 billion, after the settlement charges, would put the earnings valuation to 17.8x forward P/E. Toyota is valued as more expensive than GM and Volkswagen. GM is currently valued at only 7.1x forward earnings, and Volkswagen is valued at 6.61x forward P/E.

Interestingly, many investment gurus have been buying Toyota in the second and third quarter of this year, including John Rogers, Bill Gates, Donald Smith, and Ken Fisher. Ken Fisher is holding nearly 4.75 million shares in the company, Bill Gates owns 153,300 shares, Donald Smith and John Rogers holds 369,197 and 2,950 Toyota shares, respectively.

Foolish Bottom Line

I think Toyota is regaining its top global carmaker position, surpassing GM and Volkswagen, even with the recent recall and settlement. This might be the reason why it received a much higher valuation in the stock market compared to its peers. However, I have pointed out previously that GM seemed to be the low risk bet with good potential, and Volkswagen is poised to benefit shareholders in the long run as well.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus