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Investment Overview for Toyota (NYSE:TM)
Toyota Motor Corporation is the world's largest automaker by sales and is headquartered in Japan. Toyota is engaged in the development, manufacturing, distribution and sales of a wide range of automotive products, mainly passenger cars, SUVs and trucks. Toyota's sales are concentrated in Japan and North America, but Asia and South America have seen rapid sales growth in the recent past. Toyota sells its vehicles under mainly three brands: Toyota, Lexus and Scion. It also has a majority stake in Daihatsu and Hino Motors, and minority shareholdings in Fuji Heavy Industries, Isuzu Motors, Yamaha Motors and Mitsubishi Aircraft Corporation.
- Toyota Automotive Gross Margins:
Toyota's gross margins improved significantly in 2014,from 13% to 17.8%, following the yen devaluation. Revenues earned from overseas markets translated to more Yen. Once the effect of a weak Yen is discounted, the margins should stabilize from there on. A 100 basis point change in the long term gross margins can change the estimate price by more than 10%.
- Total Cars Sold in the U.S.:
The U.S. automotive market showed strong signs of resilience in 2011 and registered a 10% growth in vehicle sales to reach approximately 13 million. The trend continued in 2012 as 14.5 million vehicles were sold during the year. 2013 was also a strong year for the automotive market as vehicle sales jumped to 15.9 million units. The U.S. automotive industry is expected to continue its show of strong growth in 2014 as well, although the rate of growth will slow down. The robust sales growth could translate into better revenue realization for Toyota in the U.S., one of the most important markets for the company.
- Total Cars Sold Internationally: According to statistics and analysis of the China Association of Automobile Manufacturers (CAAM), China registered automobile sales of approximately 22 million in 2013, an increase of 11% from a year earlier. With a penetration of only 87 cars per 1,000 people in China, there is definitely an enormous opportunity to be tapped in China. The surge in demand in the Chinese automotive market presents a huge opportunity for the company and it might become a crucial factor in the revival of Toyota's lost market share in recent times.
Europe has been going through the toughest time since the adoption of a single currency in 1999, and the crisis that started from Greece has spread through other peripheral countries as well. Auto sales in the continent are now improving after having fallen for seven consecutive years. According to Brussels based European Automobiles Manufacturers' Association, registrations for new vehicles have started rising in late 2013 and have continued into 2014. Despite this, many automakers, like Ford, Nissan and GM, have reduced capacity in Europe in order to keep a check on their profitability in the region.
International vehicle market 3.5x larger than the North American vehicle market
In 2013, U.S. auto sales amounted to 15.8 million. In comparison, there were around 3.5x as many vehicle sales (65 million) internationally, including Japan. We estimate that Toyota will be able to grow its international market share in the coming years.
Vehicle financing business driven by high volume & margins
Toyota's auto loans and lease portfolio comprises of close to $145 billion and earns an interest spread of approximately 2.6% amounting to $6.8 billion of annual gross profits. Toyota charges an average interest & lease rate of 7.8% and benefits from the low interest rates in Japan and the U.S.
Vehicle recalls by Toyota hurt its brand image
Several separate recalls of Toyota's most profitable product lines such as the Toyota Camry, Corolla, Prius and some Lexus vehicles have hurt Toyota's image of marketing itself as the economic yet reliable brand. Toyota realized as early as 2007 that several vehicles from different product lines experienced unintended acceleration, but suspected that it was due to an "all-weather" floor mat issue.
In November 2009, the company recalled 3.8 million vehicles on the same line. However, it was apparent by early 2010 that the issue included not a problem with the floor mat, but an underlying accelerator problem. The subsequent events included mass media coverage, National Highway Traffic Safety Administration (NHTSA) scrutiny, and the US congressional hearings.
In the short term, the recent recall crisis is estimated to have cost Toyota over $3 billion worldwide. As of February 2010, over 30 lawsuits have been filed against Toyota, adding onto further litigation costs. A total of 9 million vehicles have been recalled by Toyota worldwide.
In 2014, Toyota had to recall 6.5 million cars over steering and seat problems. While, in this case, the problems due to which the cars had to be recalled were being compared to the 2009 recall, the incident came at a bad time for the company. The Japanese automaker's brand image hadn't fully recovered from the previous incident and in March 2014, U.S. investigators slapped a $1.2 billion fine on the company for issuing misleading statements about safety problems in its cars.
In the long term, the recent recall crisis has hurt Toyota's brand image, both for its Toyota and Lexus lines. A day after Toyota's announcement of recalls, several of Toyota's competitors grabbed the opportunity to steal its market share. Because the average length of car ownership in the U.S. is around six years, competitors can not only take these old Toyota owners away, but also capitalize on subsequent maintenance costs.
Hybrid & electric technology to benefit Toyota in the long run
Toyota is one of the largest companies to push hybrid vehicles in the market and the first to commercially mass-produce and sell such vehicles, an example being the Toyota Prius. Toyota has said it plans to make a hybrid-electric system available on every vehicle it sells worldwide sometime in the near future. Toyota is speeding up the development of vehicles that run only on electricity with the aim of mass producing them in this decade (2010 - 2019).
Exchange rates play an important role in Toyota's profit
Toyota's profits are recorded in Japanese yen, but its sales are denominated in euros, dollars, pounds, Chinese yuan, and many other currencies. This is because 40-50% of Toyota's production still happens in Japan and most of the vehicles are exported. Fluctuations in the exchange rate between these currencies and the yen can lead to fluctuations in Toyota's profits; these fluctuations can be very large. Toyota hedges its exchange rate risk by arranging currency swaps and purchasing futures, but these operations are costly and threaten to cut into the bottom line.
Cross-shareholding among Japanese firms often results in conflicting interests
Major Japanese firms have long practiced extensive cross-shareholding. This process serves to both smooth domestic business relations, while at the same time prevent widespread foreign acquisition of Japanese businesses.
This has several potential pitfalls for common shareholders: 1) It means that a company can experience significant write downs due to stock declines of other companies it owns, even when business is otherwise healthy. 2) Accumulation of such ownership stakes means that capital is being diverted from other often more profitable tasks, such as reinvestment in the auto making business or dividends to shareholders. 3) Cross-shareholding makes it more difficult for shareholders to hold management accountable, as the managers at other major firms who own the firm can frequently interfere for their counterparts.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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