Toyota Is The Gold Standard In Production Efficiency, Is Tesla Catching Up?

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Since we last compared Tesla (NASDAQ:TSLA) with Toyota Motor’s (NYSE:TM), the world’s largest and most profitable auto company, in early February 2020, Tesla stock has soared by almost 7x, with its market cap crossing the $1 trillion mark, while Toyota stock is up just about 30%. While Toyota remains the benchmark of profitability and efficiency in the auto industry, there are signs that Tesla is also catching up. But does this justify Tesla’s surge? Let’s take a look. We’ve updated our dashboard analysis on How Does Tesla Compare With Toyota? to provide a comprehensive overview of how Tesla’s key revenue, margin, and operating metrics stack up versus Toyota’s. Parts of the analysis are summarized below.

While Toyota’s revenues came in at about $232 billion in FY’21 (fiscal year ended March 2021), compared to just about $27 billion in 2020 for Tesla, Tesla is growing much more quickly, with sales rising at a CAGR of over 44% over the last three years, compared to Toyota, which has seen little growth, with sales actually declining in FY’21. Tesla’s total deliveries stood at about 500k over 2020, compared to about 7.6 million vehicles delivered by Toyota. Tesla has guided that it intends to grow deliveries at a compounded rate of over 50% each year going forward.

Tesla’s Gross Margins stood at 25.6% in 2020, up from 25.2% in 2016, despite scaling-up production of the lower-priced Model 3 and Model Y. The company has more room to improve margins, as it cuts battery costs, expands deliveries, and upsells its self-driving software.  Toyota’s gross margins, on the other hand, have declined from around 21.3% in FY’16 to about 15.5% in FY’21, partly due to the impact of Covid-19.

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Tesla is also managing its working capital increasingly efficiently. Although Toyota has an edge in terms of inventory management, with its turnover ratio – calculated as the cost of goods sold divided by average inventory – standing at 8x versus 5x for Tesla in the most recent fiscal year, Tesla’s ratio is improving. Tesla has an edge over Toyota in terms of days of sales outstanding – a measure of how quickly a company collects money from its customers – with its average receivable collection period standing at 21 days versus 37 for Toyota. This is likely due to Tesla’s direct sales model, which bypasses dealers.

Coming to production efficiency, we estimate that Tesla delivered about eight vehicles per full-time employee over 2020, compared to about 24 for Toyota. (Note that we use total employees for Toyota, including its finance operations) However, Tesla should be able to scale up this metric meaningfully, given that it has been increasingly automating its production facilities.

So clearly, Tesla is growing much faster than Toyota, with its margins on the uptrend, and its production and operational metrics are also looking better. However, with a market cap of about $1.1 trillion, is Tesla really worth over 3.5x Toyota or effectively more than all the other major automotive companies combined? We don’t think so. We value Tesla at about $610 per share, marking a discount of about 45% below the current market price. See our analysis on Tesla Valuation: Expensive or Cheap for more details.

[2/10/2021] Comparing Tesla With Toyota

Tesla (NASDAQ:TSLA) stock is up by almost 2.5x over the last three months, making it the world’s second most valuable automaker, behind Toyota, which in many respects is the benchmark of profitability and efficiency in the auto industry. In this analysis, we compare Tesla’s key revenue, margin, and operating metrics with Toyota’s.

  • Toyota’s automotive revenues stood at about $253 billion in 2019, compared to about $21 billion for Tesla.
  • Tesla’s Gross Margins stood at 21% in 2019, down from 25% in 2016, although they remain higher than Toyota’s margins of 17%.
  • Tesla’s SG&A and R&D expenses, as a % of revenues, are higher compared to Toyota’s, although they have been declining at a fast pace, as the company scales up its revenues.
  • Being a more mature business, Toyota remains well ahead of Tesla in terms of manufacturing efficiency, producing more vehicles per employee, while utilizing its fixed assets and inventory more effectively.

Note: Toyota’s FY ends March, while Tesla’s ends in December. We have excluded numbers from Toyota’s financing business for the purpose of this analysis.

 View our complete dashboard analysis on How Does Tesla Compare With Toyota?

#1. Key Revenue Metrics

#1.1 Automotive Revenues

  • Toyota’s automotive revenues stood at about $253 billion in 2019, compared to about $21 billion for Tesla.
  • However, Tesla revenues have grown at a CAGR of over 48% compared to 1% for Toyota.

#1.2 Automotive Volumes and Average Pricing

  • Tesla’s total deliveries stood at 368k over 2019, compared to about 9 million vehicles delivered by Toyota.
  • Tesla’s ASPs remain over 2x Toyota’s at $57k , although they have trended lower due to the launch of the Model 3.

#2. Gross Margins & Operating Expenses

#2.1 Gross Margins

  • Tesla’s Gross Margins stood at 21% in 2019, down from 25% in 2016, as the company scales-up production of the lower-priced Model 3.
  • However, it is possible that margins will improve going forward, driven by growing volumes and higher automation.
  • Toyota’s margins stood at about 17% in 2019.

#2.2 Operating Expenses

  • Tesla’s SG&A and R&D expenses, as a % of revenues, are higher compared to Toyota’s although they have been declining at a fast pace, as the company scales up its revenues.

#3. Other Operating Metrics

#3.1 Working Capital Ratios

  • Inventory turnover ratio is calculated as the cost of goods sold divided by average inventory. A higher ratio indicates that a company is more efficient in managing its inventory.
  • Toyota’s turnover ratio stood at 9x versus 5x for Tesla in 2019.
    Days of sales outstanding is a measure of how quickly a company collects money from its customers. Tesla appears to be ahead of Toyota in this regard, with its receivable collection period standing at 20 days versus 30 for Toyota.

#3.2 Vehicles Delivered Per Full-Time Employee

  • We estimate that Tesla has delivered about 9 vehicles per full-time employee over 2019, compared to about 24 for Toyota. (Note that we use total employees for Toyota, including its finance operations)
  • However, Tesla should be able to scale-up this metric meaningfully, given that it has been increasingly automating its production facilities.

#3.3 Fixed Asset Turnover & Capital Expenditure

  • Fixed Asset Turnover is calculated as revenues divided by average fixed assets and measures how efficiently a company utilizes its assets. A higher number is typically better.
  • The Fixed Asset turnover ratio for Toyota stood at 2.7x, versus 1.9x for Tesla, although Tesla’s metric has been trending steadily higher.
  • Tesla’s CapEx stood at $1.3 billion, about a tenth of Toyota’s 14 billion in 2019 CapEx.

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Returns Nov 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
TSLA Return 10% 58% 2511%
TM Return 7% 20% 58%
S&P 500 Return 3% 25% 110%
Trefis MS Portfolio Return -2% 49% 304%

[1] Month-to-date and year-to-date as of 11/26/2021
[2] Cumulative total returns since 2017

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