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Investment Overview for Toyota (NYSE:TM)
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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.
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Total Cars Sold in the US:
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. In 2012, the figure swelled to 14.5 million. The U.S. automotive industry is expected to carry on the growth trajectory in 2013 although the rate of expansion might slow down. The U.S. automotive industry seems decoupled to a large extent from the sluggish European growth. Robust sales growth could translate into better revenue realization for Honda in the U.S., one of the most critical market for the company.
Going forward, the growth in the U.S. automotive industry would be very critical for the company to maintain growth in the top line.
- Total Cars Sold Internationally
According to statistics and analysis of the China Association of Automobile Manufacturers (CAAM), China registered automobile sales of approximately 19.5 million for 2012, an increase of 4% from a year earlier. The automotive market in China has more than doubled in size within a span of 4-5 years. With approximately 87 cars per thousand people in China, there is definitely an enormous opportunity to be tapped in China. The surge in demand in Chinese automotive market presents a huge opportunity for the company and it might become a crucial factor in revival of Honda's lost market share in recent times.
Europe has been going through the toughest times since the adoption of a single currency in 1999 and the crisis that started from Greece has spread through other peripheral countries as well. The economy is still in distress and governments across the Europe are adopting austerity measures to ride through the situation which is not going to help the industry either. Although, the severity of the economic distress will be different for different economies, the overall trend in sales as well as production, is expected to be a declining one. A worsening situation in Europe could prove to be a major dampener for the company.
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Toyota's international cars and trucks business is the most valuable business for Toyota. Followed by it is the company's Japanese division.
International vehicle market 4x larger than the North American vehicle market
In the U.S., 2012 auto sales amounted to 14.5 million according to a recent report by J.D. Power and Associates. In comparison, there were around 4x as many vehicle sales (65 million) internationally including Japan.
Vehicle financing business driven by high volume & margins
Toyota's auto loans and lease portfolio comprises of close to $130 billion and earns a interest spread of approximately 4% amounting to $6.8 billion of annual gross profits. Toyota charges an average interest & lease rate of 9.4% and benefits from the low interest rates in Japan and the US. In comparison, Toyota's automotive business made a gross profit of $4,507 from each vehicle sold in North America based on an average price realization of around $21,168 in 2011.
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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 have to 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 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 away. Because the average length of car ownership in the US is around 6 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 60% 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 interference for their counterparts.
Trefis Forecast Rationale for Toyota Market Share in North America
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${forecast} represents the market share of Toyota branded vehicles in North America including US, Canada and Mexico.
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Toyota's North American market share increased from 13.2% in 2008 to 12.5% in 2010. It fell below 10% in 2011 mainly due to a loss in production and to a certain extent, because of Toyota's recall of more than 8 million vehicles which made customers skeptical about the quality of the brand.
Toyota recovered strongly in 2012 with the company's market share rising to 12.0%. Going forward, the market share should not see too much of deviation now that Toyota's sales have normalized.
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Trefis considered the following factors for its forecast:
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- Toyota to gain edge through fuel efficient cars
- In December of 2007, the American government passed a bill that mandates 35 mpg for all passenger cars, trucks, and SUVs sold in the U.S. Toyota already has a leg up in meeting these standards, which should simultaneously increase demand for fuel efficient vehicles.
- Toyota is the largest seller of hybrid vehicles in the world and the first to commercially mass produce and sell such vehicles, with the best example being the Toyota Prius. It is important to note that while most automakers lose money on the sale of every hybrid, Toyota actually makes money on every Prius sale due to its high production volume.
- Toyota plans to introduce about 10 new hybrid models by
2015. These will include compact hybrids that with fuel the economy rated at 40 km/l or higher, which will create true product appeal and should stimulate demand.
- Renewed focus on safety to enhance brand strength
- Toyota is engaged in developing both active and passive safety technologies, based on the Integrated Safety Management Concept, so as to achieve a goal of zero casualties from traffic accidents.
- Under the Integrated Safety Management Concept, Toyota is pursuing safety by linking the various safety systems installed in vehicles.
- These efforts should make the company a frontrunner in terms of ensuring safety of the passengers.
- Hybrid vehicle legislation to benefit Toyota
- In the US, government agencies on the federal, state, and municipal levels have enacted legislation encouraging the adoption of hybrid technology. Under current laws, people who buy a hybrid vehicle can qualify for a federal income tax credit of up to $3,400.
- Once a manufacturer sells 60,000 hybrid vehicles, the rebate will be reduced to 50% of the original amount for the following two quarters, 25% of the original amount for the two quarters after that, and 0% from then on.
- Toyota has sold over 1 million hybrid vehicles and is the largest seller of hybrid vehicles in the world. This could allow competitors who entered the hybrid market late to catch up with Toyota as many of their rebates have yet to expire.
- Financial incentives to improve tarnished brand image
- With all the adverse publicity surrounding Toyota's safety recalls, the company is currently offering one of its biggest sales promotions ever: interest-free loans for up to 60 months and two years of free, after-sales maintenance and inspection services for new customers. We expect these incentives to continue in the near term.
- Overcoming the recall problem
- We expect Toyota to gradually overcome the recall problem and maintain its brand value as the strongest automaker in the world. The company has revamped its quality control systems and we expect the quality of vehicles to improve over the years.
- Change in sales mix in North American market will increase Toyota's sales
- Consumer are moving towards smaller cars, more environmentally friendly and fuel efficient automobiles. This is for a multitude of reasons including political tension in the Middle East, rising oil prices due to growing demand in the developing world (especially China), and increasing concerns over global warming.
- The share of cars in the US sales mix has increased from 36% in 2010 to 37% in 2011 and we expect this trend to continue.
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- Vehicle recall to hurt Toyota’s brand image
- Toyota’s reputation for safety and quality, a key elements in its success, have taken a battering in recent times. A series of recalls in recent years was capped by announcements in November 2009 and January 2010 that the automaker would recall more than eight million cars globally to resolve a widespread problem associated with unintended acceleration.
- The automaker said in January that it would temporarily stop building and selling eight models in the North American market.
- Toyota suffered another blow to its reputation when Japanese authorities told it to investigate reports of faulty brakes on the Prius, a centerpiece of Japan's cutting edge technology. Approximately 437,000 of its 2010 flagship Prius hybrid and other gas electric models were recalled worldwide.
- Intense competition to eat into Toyota's market share
- Toyota faces immense competition in the North American market with automakers such as Honda, GM, Chrysler, Ford, Hyundai and Volkswagon among others.
- Any gain of market share usually happens at the expense of loss of some other automaker's market share and Toyota has witnessed this trend in the last 2-3 years when its market share was eaten up by GM, Ford and Chrysler.
Back to Company OverviewHow 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.
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