Why Toyota Is More Valuable Than GM, Ford & Honda Combined – Part 2

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TM: Toyota Motor logo
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Toyota Motor

Toyota Motor (NYSE:TM) has a greater market capitalization than that of General Motors (NYSE:GM), Ford (NASDAQ:F) and Honda (NYSE:HMC) combined. In the first part of this two-part article series, we talked about the impact of geographic sales mix and transaction prices on the respective valuations of these companies. Below we explore how margins explain the difference in valuations.

Toy1While our valuation for Toyota (over $200 billion) is more than the sum of  GM, Ford and Honda combined (roughly $175 billion), its advantage in terms of enterprise value, net revenue and revenue per unit sold is not as comprehensive. The actual explanation of Toyota’s ability to consistently operate on higher margins. Even though Toyota sold the highest number of vehicles among these companies in 2015, it still commanded the highest operating margin, and that too by a distance. This is testament to Toyota’s significant expertise in production process of vehicles.  This is historically the main driver of profitability and has allowed the company to gain in market share in the auto industry. This makes, Toyota the most cheaply valued stock as compared to GM, Ford and Honda relative to enterprise value.

Toy4Interestingly enough, Toyota’s adjusted EBITDA for automotive divisions in 2015 stood at $27 billion, which was equal to automotive division EBITDA of GM ($12 billion), Ford ($8 billion) and Honda ($7 billion) combined. It is also worth noting that the EBITDA margin presented for Ford and GM in the table above are from an exceptionally profitable year. If one takes a longer time frame to compare these companies, Toyota’s lead becomes clear.

  • Toyota’s revenue faced FX headwinds over the last couple of years due the strengthening of the U.S. dollar over the Japanese Yen and many emerging market currencies. It still managed to improve its margins over the same period. Looking ahead, Japan’s sluggish economy, aging demographic and saturated car market are likely to present a challenge to Toyota in the future. Its strong position in North America is likely to keep its margins robust.
  • GM and Ford have both benefited from the booming SUV and crossover market in the United States. As a result of the presence of vehicles from these segments in their overall sales mix, they were both protected from the impact of negative foreign exchange effects. The macroeconomic conditions in China, Russia and South America are especially challenging for these companies. Moreover, the likely slowdown in growth in the U.S. auto market could lead to limited growth in profits for both the American automakers.
  • Honda had a terrible start to 2015, with the company undergoing change in CEO following disastrous expansion plans. Subsequently, Honda recovered in the latter half of the year, posting very strong results in the September- and December-ended quarters. These gains are likely to continue in the future as Honda increases its presence in the high-margin SUV, crossover and mid-sized pick-up truck segments.
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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Honda | Toyota | General Motors | Ford

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