Kingdon Is Finding Alpha in the Japanese Kingdom

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Mark Kingdon, founder of Kingdon Capital, appeared at CNBC's Delivering Alpha's conference last week where he touted his best investment ideas. His overwhelming theme? Japan. He loves the Japanese auto market, which will prove to be the biggest benefactor of Abenomics. His specific picks included Mazda, Fuji Heavy and Toyota Motor (ADR) (NYSE: TM).

Toyota is making a comeback, while Subaru continues to focus on safety and is moving to higher-margin vehicles. Kingdon notes that Mazda has the biggest upside with the most risk. All three car stocks trade at forward price-to-earnings ratios of less than 10, but Kingdon sees fair value of 13 times. 

Assuming Toyota trades at 13 times forward earnings, its fair value is over 10% higher than current trading levels. Kingdon notes that the wages of workers will be rebounding in Japan and the U.S., which will lead to higher Toyota sales. Sales are expected to be up 7% in fiscal 2014. 

Back in 2008, Toyota took the top stock as the largest seller of vehicles by volume. But thanks to various Asian-specific issues, including the Tohoku earthquake and tsunami, it lost this top spot. But in 2012, Toyota regained its title as the leader, surpassing General Motors (NYSE: GM). Toyota sold 9.7 million vehicles in 2012, compared to GM's 9.3 million. 

For fiscal 2013, over 25% of Toyota's unit sales were generated in Japan. The company hopes to maintain its market leadership in the country with the introduction of new cars. This should help it to achieve its goal of 40% market share in Japan. Meanwhile, North America makes up 28% of revenue, where Toyota has been increasing production over the past few years. 

Toyota also owns the number-one spot in hybrid offerings and plans to introduce eight compact car models in the emerging markets by 2015. This includes Brazil, China, India and Indonesia. Toyota is hoping that sales to emerging markets will be 50% of sales by 2015, compared to 19% in 2000.

Major comp

Toyota's most notable peer is its Japanese rival Honda Motor (ADR) (NYSE: HMC). Analysts expect a 22% rise in fiscal 2014 revenue. Honda has the most exposure to the North American market among the three major Japanese automakers. While this is great for Honda, assuming that the U.S. continues its robust growth, I like the fact that Toyota has some of the best exposure to the faster growing emerging markets. 

Autos accounted for nearly 80% of Honda's fiscal 2012 sales, while motorcycles were 13.5%. The company's production operations are conducted primarily in 30 separate factories, four of which are located in Japan. Even still, during fiscal 2013, nearly 70% of sales were from outside Japan.

Competition abroad 

GM still has the government bailout and bankruptcy filing overhang, but I believe the company is now a turnaround story. GM has been shrinking its North American production, while focusing on on fewer brands. The company is turning to the emerging markets for future growth. China and India, the world's two most populous countries, are the keys. It plans to invest $11 billion in the countries by 2016. 

For China, GM plans to build four new plants in the country; this should help boost annual production to 5 million vehicles and triple exports from Chinese plants. Its bankruptcy allowed the company to shed billions of dollars in liabilities. GM has strengthened its balance sheet since its bankruptcy, now having over $20.5 billion in cash as of 1Q, compared to total debt of $18.4 billion. This cash balance was boosted by the 1Q 2013 free cash flow of $1.4 billion generated in 1Q, compared to the $280 million in the same quarter last year. 

Bottom line

It's hard to disagree with Kingdon when you consider that Toyota is trading at a forward P/E ratio that's 11.7 times -- this is below Honda's 13 times. Toyota appears to be a leader and it's breaking into the emerging markets. Meanwhile, GM is also an interesting investment choice. The automaker trades at only 8.3 times forward earnings and is still very much a turnaround story. 

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.


Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends General Motors. 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!

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