Toyota (TM) has multiple positive catalysts that don’t appear to be reflected in TM stock. Consequently, Toyota stock is highly attractive and well positioned to rise significantly over the next year or two.
The most recent positive catalyst for Toyota stock is the signing of the Trans-Pacific Partnership trade deal, more commonly known as the TPP.
Japan’s auto industry stands to be a big beneficiary of the deal, according to Vice Chairman Kenji Yumoto of the Japan Research Institute, a sentiment reiterated by both Bloomberg and Automotive News.
But what exactly does the TPP entail for owners and prospective buyers of TM stock?
What the TPP Means for Toyota Stock
One major reason for the optimism is that the TPP will enable Japanese automakers such as Toyota to obtain 45% of their parts from countries outside of the TPP and still qualify for the tariff reductions included in the deal.
By contrast, NAFTA requires that 62.5% of vehicles’ parts be made in the U.S., Canada or Mexico to qualify for tariff reductions. Under the TPP, Japanese factories will be able to increase the amount of “cheap parts from neighboring countries such as China,” while still paying low tariffs, according to Automotive News.
Consequently, Japanese automakers, led by Toyota, will have “another edge” over the U.S. when it comes to exporting vehicles to other TPP countries, such as Chile and Vietnam, which are viewed as “the next wave of sales growth,” Automotive News stated.
And it’s important to note that TM has several plants in North America, so it is well-positioned to benefit from reduced tariffs on auto exports to the South American signatories of the TPP, Peru and Chile.
Further, the TPP gradually reduces U.S. tariffs on Japanese auto exports to the U.S., giving the Japanese companies “another welcome tailwind,” according to Automotive News.
Some have questioned whether and how soon the TPP will pass Congress. But over the last two decades Congress has approved several controversial trade deals, including the NAFTA agreement and trade deals with South Korea, Panama and Columbia. Moreover, this Congress agreed to give President Obama fast-track authority for the TPP deal, and Republicans, who have majorities in both houses, tend to be more in favor of free trade than Democrats.
Although it would not be surprising to see the vote on the TPP deal delayed until after the 2016 elections, the period between Election Day 2016 and early January 2017, when both the president and Congress will be lame ducks, looks like an opportune time for the deal to be ratified.
Other Catalysts for TM Stock
Meanwhile, Toyota, the world’s second-largest automaker, is well positioned to benefit from the struggles of the planet’s largest automaker, Volkswagen (VLKAY)
Given the huge hit that Volkswagen’s image has taken, and the fact that a number of the two companies’ models compete head-to-head, Toyota looks poised to take share from its German rival in China, where Volkswagen is strong but its sales were already weakening before its fuel emissions scandal.
TM could also take a great deal of share from Volkswagen in Europe, where the German automaker was previously the leader with 25% of the market.
Additionally, Toyota stock should continue to benefit from the weak yen, which Ford’s (F) CEO has said boosted the Japanese company’s earnings by $10 billion in 2013.
Finally, TM reported strong fiscal first-quarter results, as its net revenue jumped 9% year-over-year and its net income surged 10%. No doubt the company is benefiting from the strong U.S. auto market, and should continue to do so going forward.
Despite all of these positive catalysts, Toyota stock is down slightly this year, indicating that the company isn’t being given much credit for these upbeat trends.
And investors who get in now can ride these positive catalysts to big gains in Toyota stock from here.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
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