Looking at Toyota’s Sales Impact from Quake

Toyota Motor Corporation (NYSE:TM) is the world’s largest automaker by sales and is headquartered in Japan. Here we consider some downside scenarios to its stock value from lower sales and higher capital expenditures after Japan’s earthquake and tsunami. Toyota sells its vehicles mainly under three brands: Toyota, Lexus and Scion, and competes globally with automakers like BMW (GR:BMW), GM (NYSE:GM), Ford (NYSE:F), Honda (NYSE:HMC) and others.

We have a price estimate of $80.30 for Toyota stock, roughly in line with the current market price.

Toyota’s Operations Affected by Quake

Toyota and its affiliates have three factories in the Tohoku region, a center for auto manufacturing in Japan that contributes about 8% to Japan’s GDP. This area suffered from heavy damage following the earthquake and tsunami. Toyota subsidiary plants that produce parts and vehicles stopped production following the quake but were able to start production at two plants that make hybrid models around 15 days after the tsunami hit. However many of its suppliers from northeastern Japan are still not functioning.

Toyota expects to start producing more models for Japanese market by mid-April depending upon the recovery of parts and materials supplies.

Expect a Dip in Sales to Recover in Coming Years

Given the toll that the earthquake and tsunami have taken on Japan and on the infrastructure, we expect that automobile sales will remain subdued in the short-term in Japan. We expect automobile sales will pick up starting next year as people recover from their losses and as Japan rebuilds its infrastructure.

We can see a scenario where total vehicle sales in Japan could decline by around 10% this year and from 0-5% next year, before recovering by 3% in 2013, 2014 as people recover gradually from their losses and as the Japanese government rebuilds the damaged infrastructure. Thereafter we expect car sales to resume our normalized growth trend over the remaining Trefis forecast horizon.

Toyota’s Auto Capex Could Increase Significantly as it Looks to Restore

We expect that Toyota will have to increase its investment significantly to restore its facilities in Tohoku region, which has suffered significant damages. Also, we believe that Japan may make its policy on building norms more stringent given the scale of the devastation in order to preempt future losses from such natural calamities. Even without more stringent policies, Toyota may need to invest to repair its facilities and ensure that they are better protected for future natural disasters.

In our scenario, we believe that capital expenditures as percentage of revenues could rise sharply by 50 basis points this year and 30 basis points next year. Thereafter we expect it to grow at our previously forecasted rates over the remaining forecast horizon.

Potential Downside

The scenarios mentioned above taken together imply Toyota’s stock price $72.70, almost 10% downside from our $80.30 price estimate. You can test this scenario and others by dragging the trend line in the interactive chart above.

See our full analysis and $80.30 price estimate for Toyota stock