Toyota Motors (NYSE:TM) has been in the news recently for the wrong reasons. The automaker faced litigation charges back in 2009, when its vehicles were reported to experience ‘unintended acceleration’. The settlement was reached in March this year and would require Toyota to pay a massive $1.2 billion to the U.S. Justice Department.
In these four to five years, the automaker has done well to restore the confidence of the general public since the vehicles were recalled. Thus, damages related to the lawsuit will be solely restricted to reductions in cash & cash equivalents. Future cash flows are not likely to get affected by the outcome of this lawsuit. Moreover, the timing of the settlement comes in at a favorable time for Toyota since the company is cash rich currently.
Toyota’s shares are down almost 10% this year despite the company posting record profits during the third quarter. Concerns over weaknesses in emerging markets, combined with a slow start to the year in the U.S. have been a drag on the company’s shares. Toyota’s U.S. sales through February are down 5.7%, compared to a 1.4% decline for the entire industry.  North America is one of the biggest markets for Toyota and accounts for more than 25% of the company’s sales. Therefore, it isn’t surprising to see any weakness in the region affecting the company’s overall valuation.
Not All Negative
Even though Toyota’s overall sales are in red, the automaker’s light truck sales are up 4.9% in the same period vs 4.1% industry wide gains. The light truck category consists of pickup trucks, SUVs and crossovers. Toyota’s sales in this category are being boosted by the RAV4, whose sales are up 33% through February. The refreshed model is helping the company attract more customers.
Another vehicle that continues to do well is the Tundra, with sales up 8.4% in February. In 2013, the vehicle’s sales were up 7.2%.  The refreshed model, introduced last year, is more muscular and spacious giving it a distinct American look. Grabbing more market share of the pickup segment, currently dominated by the Detroit Three, remains a long-term agenda for Toyota. The recent results highlight that the automaker is on the right track.
In the car category, there is an opportunity for Toyota to reverse to trend with the help of the revamped Corolla, which debuted last year. Corolla’s sales accelerated after the refreshed vehicle was introduced during the second half of 2013. In 2014, Toyota plans to sell 330,000 Corolla vehicles, 10% more than the amount sold last year, as the new model will now be available for the entire year.
In addition, the Camry is another model which could see some growth, especially during the second half of 2014, when its revamped version will go on sale.  There was a time when there were pretty much only two options in this category – the Accord or the Camry. However, others have joined the fray now and with plenty of good cars in this segment, the Camry’s position is under threat. In fact, through February, Nissan’s Altima has outsold the Camry. Therefore, a model upgrade becomes all the more necessary. The 2015 version of the Camry will be displayed at the upcoming New York Auto Show. The Corolla and the Camry together account for about 30% of Toyota’s sales in the U.S.
Other Factors That Could Help Toyota
Major automakers in the U.S., including Toyota, could also gain from GM’s recent negative publicity, which could affect its future sales. GM has recalled more than 3.1 million in the last two to three months on the back of safety concerns due to faulty ignitions. This can potentially tarnish the reputational gains made by the automaker since its bankruptcy.
The exchange rate is also working in Toyota’s favor. The yen has continued to remain weak, with the exchange rate persistently below 100. Toyota’s recent series of profit beats have been, to a large extent, aided by a weaker than expected yen. Toyota has benefited strongly from a deteriorating yen since the automaker produces almost 40% of its vehicles in Japan. The overseas profits translate back to more yen when repatriated. Overall, the picture for Toyota doesn’t look as bad as the decline in the share price suggests.
We have a $128 price estimate for Toyota, which is about 15% higher than the current market price.Notes: