- Automotive Segment constitutes 97% of the Trefis price estimate for Toyota's stock.
WHAT HAS CHANGED?
- Latest Earnings
Toyota's Revenue in Q1 2022 (ended Jun 2021) was reported as $70.9 billion, up by 88% y-o-y as the Q1 2021 was heavily affected by the coronavirus pandemic. The earnings also improved to $3.09 from $0.53 in the same period of the previous year. Sales volume rose by 85% y-o-y from 1,158K units to 2,148K units for the quarter.
- Impact of coronavirus outbreak
Toyota's stock has suffered as states and countries are on lockdown. As industries have halted production and services, the demand for automobiles has taken a hit with consumers focusing solely on essentials and not discretionary products. Further, the company has had to shut down its plants, which has led to further declines in its stock. Q1 saw high fall in sales volume across segments while Q2 2021 (ended Sept 2020) saw part recovery due to lockdown restrictions easing across regions. In Q3 2021 (ended Dec 2020) sales saw a positive growth
- Initiatives In The Mobility Segment
To build a competitive edge, Toyota Motors is accelerating its initiatives in the mobility segment and recently entered into a collaboration with Panasonic in the field of next-generation batteries. The company is also aiming to "cultivate tough professional manufacturing groups" who can handle changes in the automotive landscape. Toyota Motors is working on several improvements in its manufacturing process, which can reduce costs and build a competitive edge. In January 2019, it signed an agreement with Panasonic to establish a joint venture related to automotive prismatic batteries. For the automated driving sector in January 2019, the company rolled-out the P4 automated driving test vehicle and introduced Toyota Guardian(TM) autonomy at CES.
- Shifting Car Market in North America
Toyota has dominated the U.S. passenger car market with its popular sedans. However, this market is now shrinking with customers preferring crossovers and SUVs. The company continued to see a decline in volume and EBIT. The company is looking to review its current models to maximize vehicle sales and profitability and resolve the gap between supply and demand. Higher sales incentives and reduced production in North America are impacting the company's profitability adversely.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
- Toyota Automotive Gross Margins:
Toyota's gross margins increased from 25% in 2017 to 25.5% in 2021. This level is higher than Toyota's competitors like GM and Ford. 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 11%. 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 22%.
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.
SOURCES OF VALUE
International Sales are 2x more than the North American vehicle market
In 2020, Toyota's North America auto sales amounted to 2.7 million. In comparison, there were around 2.3x as many vehicle sales (6.2 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. The Japanese automaker is an expert in the production process of vehicles and consistently designs and manufactures vehicles more efficiently than its competitors.
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 soon. Toyota is speeding up the development of vehicles that run only on electricity.
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 substantial. 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 a 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 automaking business or dividends to shareholders. 3) Cross-shareholding makes it more difficult for shareholders to hold management accountable, as the managers at other significant firms who own the firm can frequently interfere with their counterparts.