VALUATION HIGHLIGHTS

1. Automotive Segment constitutes 92% of the Trefis price estimate for Toyota's stock.

WHAT HAS CHANGED?

1. Toyota's Q3 FY'24 Results

Toyota posted revenues of ¥12.04 trillion ($80 billion) for Q3 FY'24, marking a 23% increase year-over-year. Profits for the quarter came in at ¥1.36 trillion ($9 billion), almost doubling year-over-year. Toyota also raised its full-year sales projection to ¥43,500 billion ($294 billion), from an earlier estimate of ¥43,000 billion ($290 billion).

Note: Toyota's Q3 FY'24 ended on December 31, 2023

2. Toyota gets more serious about EVs

Although Toyota was traditionally seen as a laggard in the electric vehicle space, the company is getting more serious about its EV business. The company is now targeting the sale of 3.5 million EVs and fuel cell vehicles globally by the end of the decade, with plans to market close to 30 different models. Toyota will also invest about $70 billion through 2030 towards R&D and capital expenditures for electric, hybrid, and fuel cell vehicles.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

• Toyota Automotive Gross Margins:
  Toyota's gross margins increased from 22% in 2018 to 23% in FY'22, although the metric fell to about 21% in 2023. This level is higher than Toyota's competitors like GM and Ford. We expect the metric to stabilize at levels of around 22% by the end of our review period. However, if the metric rises to about 24%, there could be a 20% upside to our price estimate. On the other hand, if the metric declines to about 20%, there could be a 10% downside to our price estimate.
  

BUSINESS SUMMARY

Toyota Motor Corporation is the world's largest automaker by sales and is headquartered in Japan. Toyota is engaged in developing, manufacturing, distributing, and selling 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

Automotive segment is Toyota's biggest segment

Toyota's automotive business accounts for over 90% of the company's revenues. The company is also the world's largest automaker in terms of total sales.

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.

KEY TRENDS

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 the 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 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 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 smooth domestic business relations while at the same time preventing a widespread foreign acquisition of Japanese businesses.

This has several potential pitfalls for common shareholders: 1) A company can experience significant write-downs due to stock declines of other companies it owns, even when the business is otherwise healthy. 2) Accumulating such ownership stakes means that capital is 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.