Toyota Speeds Away From Its Recent Woes

by Susan J. Aluise | November 6, 2012 11:40 am

The verdict is in: Toyota (NYSE:TM[1]) is speeding back from a series of setbacks and is firing on all cylinders. Despite losses stemming from a political flap between Japan and China[2], surging U.S. sales helped TM triple its fiscal third-quarter earnings and improve its full-year profit picture to $9.7 billion.

Strong sales in North America — particularly in the U.S. — helped boost Toyota’s net profit to $3.2 billion for the quarter ended Sept. 30. U.S. sales rose 15.8% to a total of 155,241 vehicles. TM shares rose more than 4% on Monday in response to the news.

The midsize Camry sedan was America’s top-selling passenger car last month — nearly 30,000 were sold, up 36% from October 2011. Other big sellers last month included the Corolla/Matrix compact, which gained 29%, and the Prius hybrid, which boasted sales that were 52% higher than a year ago.

Toyota is gaining ground in the U.S. at a time when year-over-year sales growth at Ford (NYSE:F[3]) and General Motors (NYSE:GM[4]) is beginning to cool. Ford sold 167,947 vehicles in October — a mere 0.3% higher than the same month a year ago; GM’s sales totaled 195,764. That was 4.7% higher than a year earlier. Fiat’s (PINK:FIATY[5]) Chrysler continues to make strong gains, however: Its 126,185 vehicles sold were 10.2% higher than a year ago.

Just 12 months ago this week, Toyota shares were sputtering, having slipped more than 30% since the devastating March 11, 2011, Sendai earthquake in Japan. Even though the automaker had gotten production back on track by the fall, its October 2011 sales slipped 8% anyway, to the disappointment of Wall Street. Toyota would end 2011 with its worst U.S. market performance in 30 years.

The automotive supply chain in Japan had ground to a near halt in the wake of the 9.0 magnitude temblor that triggered a devastating tsunami and meltdowns of three reactors at the Fukushima nuclear plant. The disaster took a heavy toll on production and distribution of some of Toyota’s most popular models like the Prius. Then, severe flooding in Thailand, a major vehicle parts and Asian manufacturing hub, further exacerbated inventory shortages.

At the time of the disaster, Toyota already was coming off a tough stretch. The automaker posted its worst recall year ever in 2010, involving 7.1 million vehicles in 19 separate campaigns — many involving unintended acceleration. The company paid nearly $50 million in government fines and lost significant U.S. market share.

But Toyota’s stellar third-quarter profit and strengthening U.S. sales are strong indicators that the automaker isn’t just back in the race, but in it to win. Of course, problems remain. For instance, a strong yen boosts costs, and European sales are in a slump.

And Toyota’s biggest challenge is a problem not of its own making: a territorial dispute between Japan and China over the Senkaku Islands in the East China Sea. Joint ownership claims of the eight small islands that are home to feral goats (and potential deepwater oil and gas reserves) have triggered boycotts against Japanese goods in China recently. Toyota estimates the standoff could reduce sales by some 200,000 vehicles[6].

Still, there’s a lot to like about Toyota’s prospects. The company is cutting manufacturing costs with its “Toyota New Global Architecture,” a strategy that reduces the total number of vehicle parts and enables component sharing across platforms. It’s also reportedly considering a major redesign of the Prius[7].

With a market cap of nearly $129 billion, TM is trading around $81. The stock has a tiny price-to-earnings growth (PEG) ratio of 0.26, indicating that it’s very undervalued. It has a forward P/E of less than 10, higher than Ford and GM, which are round 7 and 8, respectively. It has a current dividend yield of 1.8%.

I rank Toyota a buy, but I’d prefer to wait a few weeks for the current earnings exuberance to fade a bit. An opportunity for a bargain after the first of the year might be another possibility.

As of this writing, Susan J. Aluise didn’t own any securities mentioned here.

Endnotes:
  1. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM
  2. political flap between Japan and China: http://investorplace.com/2012/10/japans-carmakers-are-losing-big-in-china/
  3. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  4. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  5. FIATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIATY
  6. reduce sales by some 200,000 vehicles: http://online.wsj.com/article/SB10001424052970204349404578100011790486432.html
  7. considering a major redesign of the Prius: http://www.sfgate.com/business/bloomberg/article/Toyota-Mulling-New-Prius-With-Record-Sales-4010198.php

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