Toyota’s Production Sinks, Downside to Loan & Lease Business

Toyota Motor Corporation (NYSE:TM) is the world’s largest automaker by sales and is headquartered in Japan. We believe that the damage in Japan from the earthquake and tsunami will negatively impact Toyota’s lease and loans portfolio, which contributes 27% to Toyota’s stock value. Toyota sells its vehicles under mainly three brands: Toyota, Lexus and Scion, and competes globally with automakers like BMW (GR:BMW), GM (NYSE:GM), Daimler (ETR:DAI), Audi (NSU:GR), Ford (NYSE:F), Honda (NYSE:HMC) and others.

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

Toyota’s Operations Affected by Quake

In the recently reported March sales results, auto production in Japan sank 62% to 129,000 vehicles, which is the lowest figure in decades. Global production dropped around 29% as a result and Toyota predicts that its 2011 global production would register around 7.7 million vs. 8.4 million last year, though many analysts think this number will be revised lower over time. ^[1] With this, Toyota would cede the title of largest auto producer to GM which is posting huge growth numbers in China and a recovery in U.S. auto sales. Other winners include Korean automakers such as Hyundai and Kia that should gain ground on Japanese auto makers.

Loan and Lease Business Affected

We believe that Toyota can incur significant losses on its vehicle leases and loans portfolio in Japan as many people in the tsunami-affected areas have suffered immense losses. Further, because many dealerships have been damaged and many people have lost their cars, we expect that such dealers and end-users to increasingly default on their outstanding loans. We further believe that the tough economic scenario in Japan can cause a drop in total outstanding leases and loans in the short term.

In a negative scenario, we could see interest & lease rates earned on vehicle loans & leases could decrease by 1 percentage point each year for the next two years as more people and dealers default on their outstanding leases and loans. We expect it to recover to its current levels and continue to grow in subsequent years.

Further, total outstanding leases and loans could drop by as much as 3% over the next two years before recovering by 4% as Japanese economy and infrastructure recover. Thereafter, we expect it to continue growing at our previously estimated growth rates over the remaining forecast horizon.

Potential Downside

The scenarios mentioned above, taken together, imply Toyota’s stock price of $74.70, almost 7% downside from our current $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

1. Toyota car production plummets after tsunami, Yahoo Finance online [↩]