Toyota Motor’s stock (NYSE: TM) has declined by around 14% year-to-date, marginally underperforming the broader U.S. indices. Like most other automotive names, Toyota has been weighed down by continued semiconductor and component shortages. The company’s Q1 FY’23 results, published in early August, were also mixed, with sales rising by 7% year-over-year to 8.5 trillion yen (about $62 billion) although operating income fell by over 40% year-over-year to 578 billion yen (about $4.2 billion). While Toyota saw its shipments fall by about 6.3% year-over-year to 2.01 million units for Q1, revenues did benefit from stronger pricing and a significant depreciation of the Japanese yen (down almost 20% versus the dollar in the last 12 months). Operating margins are being impacted by the semiconductor shortages and higher input costs. The company estimates that profits will remain under pressure, standing at 2.4 trillion yen (about $18 billion), down by about 20% versus last year, due to uncertainties relating to inflation, interest rates, and some macroeconomic challenges.
So is Toyota stock a buy at current levels of about $160 per share? While Toyota stock trades at about 15x forward earnings, which is well above peers such as GM and Ford, we think that Toyota warrants a premium, given its highly efficient manufacturing (gross margins of around 18%) and considerable scale, being the world’s largest automaker. Moreover, Toyota’s production could also increase in the near term as the semiconductor shortage potentially eases a bit. The company raised its full-year revenue outlook to 34.5 trillion yen (about $250 billion) up from 33 trillion yen, reiterating that it expects its automotive shipments to pick up by close to 7% for the year, despite the muted Q1 performance. Toyota is also making reasonable progress with the transition to EVs. The company’s electrified vehicle lineup, which includes hybrids and battery electric vehicles, accounted for about 28.5% of its deliveries in Q1 FY’23, up from 26.6% a year earlier. Toyota also has a lead in the development of solid-state batteries, which are viewed as the “holy grail” of sorts in the battery industry, as it could increase the range, and reduce charging times, while also making EVs safer. If the company is able to produce and deploy solid-state cells at scale, it could give Toyota’s EV business an edge.
We value Toyota stock at about $206 per share, about 30% ahead of the current market price. See our analysis of Toyota Valuation for more details on what’s driving our valuation for Toyota. Also, see our analysis of Toytota Revenue for more details on Toyota’s key revenue streams.
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