Can Toyota Bank on the 2014 Tundra?
Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The fact that Toyota (NYSE: TM) has finally woken up to the callings of the truck market in the US is apparent from the unveiling of the 2014 Tundra pickup at the Chicago auto show in February. Finally Toyota has given its Tundra a makeover – the first major one since 2007. The US truck market is witnessing strong demand and I believe that Toyota’s move is in the right direction.
While I do not expect this to have an immediate impact on investors perception towards the stock, which is already trading at a premium to peers in the auto segment like Ford (NYSE: F) and GM (NYSE: GM), my purpose is to attract attention of investors towards this for a couple of key reasons. Firstly, the February sales numbers for Toyota are weaker than expected surprisingly due to weakness in car sales which turns the spotlight on the company’s truck business. Next, the trucks carry fat margins which can alleviate some of the pressure that the company is facing in Europe and even China.
Weak car sales
In February Toyota posted a 4.3% increase with 166,377 vehicle sales. Reversing its usual pattern where truck sales trail car sales, Toyota gained from the strong truck market posting 16% rise in SUVs and trucks while losing out on its cars, which were down 3%. The weakness in the car sales was unexpected and what was more surprising was that the best selling Camry was down 9.5% - marking the biggest drop in the last 16 months. And the key to this lies in company’s aggressive pricing strategy and heightened competition. According to Edmunds.com, among the top midsize Sedans, Camry’s February incentive of around $1,505 per car was the second lowest. In comparison Ford Fusion offered around $2,155 and Nissan Altima $1,765. In fact across all vehicles Toyota’s prices were higher by 5.9% vis-à-vis industry average of 1.2% increase. This weighed down on sales volumes. In contrast Ford recorded 9.1% increase in units sold and GM 7.2%.
Europe and China
Toyota has already lost €1 billion in Europe between 2007-2010.While the company has really done well to restructure its operations through stringent cost cuts and the 2012 and 2013 profit guidance is welcomed news across the entire investor community, the fact remains that Europe will continue to remain challenging. In 2012 the European car market contracted by 8.2% and Toyota management sees further contraction of 5-10% for the entire automotive market in 2013. It is worth noting that both Ford and GM do not foresee breaking even before 2015.
Meanwhile, the situation in China has worsened. Toyota and other Japanese automakers had suffered in the second half of 2012 on account of tension over the disputed islands. Just when it was thought that the trends are reversing in January, February has brought in news of a 47.5% slump in monthly sales for Toyota. The January-February period was down 13.3%. It looks like the pressure will continue till the diplomatic issues are cleared.
Truck market upsides
The US automotive market has had a dream start this year with sales in units up 14% in January and 4% in February. Truck sales have been particularly strong. It is estimated that trucks comprise around 11% of the US automotive market. This demand is fueled by the strong housing starts and growing consumer confidence. In February it was estimated that the annualized sale of cars and trucks was 15.4 million, which is higher than the 15.1 million expected by economists polled by Thomson Reuters. February marked the fourth consecutive month with over 15 million in annualized sales. We are also enthused by GM’s statement that its truck sales to small business like bakeries, caterers, and plumbers was up 40%.
I think the greatest upside that the industry would see would come from replacements. It is estimated that the age of an US vehicle on the road is over 11 years and according to TrueCar.com it is the truck owners who have delayed their purchases the most. Toyota’s truck sales have come in strong in February with both Toyota Tacoma and Tundra posting double digit gains year-over-year with 18.5% and 15.5%, respectively.
This has staged the right platform for the arrival the new 2014 Tundra. The look and feel of this sturdy truck is very American and offers improved interiors and exteriors as well as all of Toyota’s safety equipment The new Tundra is scheduled to reach the dealers in September.
Toyota has around 6.3% share in the US truck market. The rest of the market is held by the big three US automakers. Ford has 39.9%, GM 35.6%, and Chrysler RAM trucks have 18.2%. The biggest bottleneck for Toyota in this segment is that time has proved that Americans like to go ahead with domestic names when choosing their pick-ups. In February the Ford F-series, the leader of the pack, sold 101,330 trucks while GM sold a combined 104,067 vehicles for its Chevrolet Silverado and GMC Sierra pick-ups. Chrysler came in third position with its RAM trucks selling 43,763 units. In comparison Toyota Tacoma sold 24,266 units and the Tundra 14,310 units. So gaining market share will be an uphill task for Toyota. Truck makers are offering all sorts of incentives to woo buyers. Like GM for example is offering free scheduled maintenance for two years or 24,000 miles on its full-size Chevrolet and GMC trucks. Besides, all the new models being launched have some aces up their sleeves. The 2013 RAM will be offering 30 mpg diesel and the new GM models are slated to come with DI and cylinder deactivation. Ford will be launching its new F-series models in 2014.
While Toyota has emerged as world’s largest automaker in 2012, it is facing a host of operational issues like recalls, management changes, as well as challenging market conditions in Europe and China. In addition the overall US February sales have been much weaker than expected. While the company is facing hordes of operational challenges, one of the few things that are going well is the strong demand in the US truck market. Toyota is moving in the right direction if February numbers are to be considered and the re-launch of Tundra assumes greater significance than it would have normally merited. While I do not think that any major trend reversals are in the cards as far as market share is concerned, Toyota investors should keep an eye on the new Tundra.
Eshna De has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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!