Is it Time To Go on a Ride with Toyota?

By Ryan Guenette - August 18, 2012 | Tickers: F, GM, HMC, TTM, TM | 0 Comments

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The morning of March 11^th, 2011 awoke the world to news of a horrific occurrence. An earthquake with a 9.0 magnitude unleashed its wrath off the east coast of Honshu, Japan. The earthquake generated a 23-foot tsunami that raced inland, carrying houses, cars, trees, buildings, and people alike. In turn, the tsunami disabled the power supply and cooling of three reactors, causing mayhem. Scientists committed weeks of effort to stabilize the nuclear reactors, yet huge amounts of radioactive material had already been released into the atmosphere, as well as the soil around the plant. The National Police Agency of Japan reported that as of September 11^th, 2011 a total of 15,854 deaths, 26,992 injured, and 3,155 people were missing. My prayers and thoughts go out to all those affected by this disastrous event.   

One company severely impacted by this occurrence was Toyota Motor Company (NYSE: TM). In result of the earthquake and tsunami, Toyota lost its spot as the world’s top-selling carmaker to General Motors. Toyota’s quarterly profits got crushed more than 75%, year over year, after the March earthquake and tsunami demolished parts suppliers in northeastern Japan, extensively disrupting car production. Since that notorious date, Toyota has declined 10.99%, while the S&P 500 has rallied 6.28%. So is it time to go on a ride with Toyota?

Rebounding Fundamentals

In 2002, Toyota reported earnings per share of $2.29. In 2012, the average analyst consensus projects the company earning $4.46. This represents an increase of 94.76% in earnings per share over the past decade. Based on these statistics, the company’s compound annual growth rate (CAGR) is 6.89%, a respectable rate for the largest carmaker on the face of the world. This decade runs through the financial collapse of 2008, yet Toyota is still able to nearly double their earnings per share.  Currently, Toyota Motor Company pays out an annual dividend of $1.52, which at the current price, puts the dividend yield at 1.58%. This is up from last year’s annual dividend of $1.26, and is expected to further expand into the future. By 2015, the street anticipates Toyota to be paying out an annual dividend of $2.93, which at the current price, would put Toyota’s dividend as yielding 3.64%. The company has been paying out dividends since 1993. From this we can see Toyota’s consistency in growing its earnings, as well as its expanding dividend that will reward investors for years to come.

The chart below displays Toyota’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Looking Forward

Toyota’s president, Akio Toyoda, stated that the company’s long term growth goal is to sell ten million vehicles a year by 2015. In 2010, Toyota sold 8.42 million vehicles. Much of Toyota’s growth is expected to be fueled by growth in emerging market economies, such as Latin America, India, and China. As the middle classes grow in these emerging market economies, more and more people will buy cars, as they now have the money to make such purchases. The emerging markets’ strength is shown in the chart below, compared to mature markets.

Additionally, Toyota anticipates taking advantage of the growing popularity of hybrids and other fuel-efficient vehicles. With a gallon of gas nationally priced at $3.69, consumers are more aware of the pain at the pump. To battle this epidemic, many have purchased more fuel efficient cars. Toyota said it will introduce 10 new hybrid models by 2015, hopefully taking advantage of the growing concern for the environment.

Finally, Toyota expects to focus more resources on quality, not quantity. Toyota has always had a label of being of a lower quality than other brands, but that is expected to change in the future as Akio Toyoda states, “the focus of production in Japan has been shifting from volume to quality, so we can build the system that can deflect the negative impact of the higher yen but that's a race against the clock.”

In conclusion, Toyota has a rock-solid growth strategy, which includes deriving growth from emerging market economies, as well as taking advantage of changing consumer’s needs.

Who Has The Sweetest Ride?

Compared to some of Toyota’s most prominent competitors, such as: Ford Motor Company (NYSE: F), Honda Motor Company Limited (NYSE: HMC), General Motors Company (NYSE: GM), and Tata Motors Limited (NYSE: TTM), Toyota stands in the middle of the road.

In terms of growth, Toyota is unmatched, while General Motors does not even double. All companies except for GM pay out dividends, with Honda possessing the largest dividend, and Ford possessing the fastest growing dividend. In the fundamental ratio comparison, Tata is rather expensive, while Ford trades at a bargain. All companies trade below the ratio of 1 when growth is taken into account. In the net profit margin comparison, Ford stands out to the upside, while Toyota stands out the downside.

The Foolish Bottom Line

The terrible earthquake and resulting tsunami not only had a huge human toll, but also a financial toll. Toyota’s sales dropped 75% in result of the devastation, yet are well on their way to rebounding completely. Toyota has shown decent single digit growth over the past decade, through thick and thin, and should continue to grow at the same pace in the coming decade. Additionally, Toyota has a rewarding dividend, as well as a rock-solid plan for growth. Toyota will derive growth from emerging market economies, as well as take advantage of changes in the marketplace. All in all, Toyota is a great way to play Japan’s rise from the ashes, but is highly linked to the volatile global market, and is not a name I need in my portfolio.     

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