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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. The company also runs a Housing, IT and other services business in Japan.
- Toyota Automotive Gross Margins:
Toyota's gross margins improved from 20.2% in 2012 to 25.1% in 2013, following the yen devaluation. The trend continued through 2014 and 2015, with the gross margin ending at 26.5% in 2015. Revenues earned from overseas markets translated into more Yen. Once the effect of a weak Yen is discounted, we expect the margins to stabilize in the long run. A 30 basis point rate of growth per year over the rest of our forecast period could lead Toyota's valuation to go up by more than 15%. A 30 basis point decline in growth per year over the rest of our forecast period could lead Toyota's valuation to go down by 15%.
- Toyota's Vehicle Price in North America:
The U.S. automotive market showed strong signs of resilience in 2011 and registered a 10% growth in vehicle sales, which reached approximately 13 million units. In 2012, the momentum continued as 14.5 million vehicles were sold during the year. The U.S. automotive industry continued its show of strong growth in 2013, 2014 and 2015 as well, growing at a rate of 7.9%, 6.1% and 5.4%, respectively. The same trend is expected to continue in 2016, although the rate of growth is expected to slowdown further. The robust sales growth could translate into better revenue realization for Toyota in the U.S., which is one of the biggest markets for the company. Going forward, the growth in the U.S. automotive industry will be the most decisive factor for the company in maintaining top line growth. If Toyota manages to increase its market share in North America to over 15% (as compared to our current estimate of 12.4%) by the end of our review period, there will be an approximate 10% upside in our valuation for the company. On the other hand, if the company's market share declined to 8.5%, there will be a similar downside in our price estimate.
International vehicle market is 4x larger than the North American vehicle market
In 2015, U.S. auto sales amounted to 17.9 million. In comparison, there were around 4x as many vehicle sales (67.4 million) internationally, including Japan. We estimate that Toyota will be able to grow its international market share in the coming years.
Toyota has superior operating margins compared to the rest of the auto industry
Even though Toyota sells more vehicles than any other auto company, it still posts higher operating margins than most of its competitors. For example, in 2015, Toyota sold 10.1 million units, compared to GM's 10 million, Ford's 6.6 million and Honda's 4.5 million; but its operating margin at 12.5% was over 4.5 percentage points higher than the next best of GM's 8%. The Japanese auto maker is an expert in the production process of vehicles and consistently designs and manufactures vehicles more efficiently than its competitors.
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 U.S. 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 had 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.
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 and 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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