Despite a $200 billion market capitalization, Toyota Motor (NYSE:TM) stock doesn’t get much in the way of attention. And it’s not hard to see why that it is.
After all, other auto stocks have investment cases that might seem more compelling to certain types of investors. Bargain-hunters and income-seekers like the low earnings multiples and attractive dividends from Ford (NYSE:F) and General Motors (NYSE:GM). Growth investors have piled into Tesla (NASDAQ:TSLA) and, now, Nikola Motor (NASDAQ:NKLA).
Toyota stock seems stuck in the middle. It’s cheap, but not as cheap as Ford or GM. It has growth opportunities, but lacks Tesla’s leadership in electric and autonomous vehicles.
As a result, despite being the 23rd-most valuable company listed on U.S. exchanges, Toyota seems almost ignored by investors. But that shouldn’t be the case: there’s both growth and value here.
An Attractive Auto Business
There’s a case that the auto manufacturing business alone supports the current value of Toyota stock. Shares trade at less than 9x forward earnings.
And Toyota might be the best auto manufacturer in the world at scale. It has massive worldwide reach, with at least 1 million units sold in each of its five operating regions in FY2020 (ending March).
In the U.S., Toyota has been running in circles around domestic automakers for decades. Ford and GM never figured out how to compete with Japanese rivals in passenger cars; Ford finally gave up on sedans two years ago. Toyota has a big presence in the growing Chinese market as well, in part via joint ventures with local companies.
The company does expect some short-term pressure. With its FY2020 results last month, the company guided for unit sales of 7 million in FY2021, down about 20% year-over-year. But obviously the novel coronavirus is driving at least some of that weakness, and there should be pent-up demand in FY2022 and beyond.
This simply is a good business — one of the best in the industry. Toyota stock isn’t priced like it.
The Battery Edge
To be sure, some investors might see Toyota as just another internal combustion engine manufacturer. ICE sales are likely to fade; in fact, given worldwide subsidies for electric vehicles, it’s possible those sales have peaked for good.
But Toyota isn’t just an ICE company. It of course has developed the Prius, far and away the most successful hybrid automobile model ever. And while investors — and the rest of us — are bullish on fully electric cars, hybrids are going to be a big part of the industry for many decades to come.
Toyota knows this. According to last year’s annual report, the company is targeting sales of 5.5 million electrified vehicles by 2030 — over half its FY2020 unit sales. That target includes roughly 4.5 million hybrid and plug-in hybrids.
Of course, that still leaves 1 million units of electric vehicles. And that target could be conservative if Toyota’s current battery efforts bear fruit. The company is looking to move from lithium-ion technology to solid-state offerings. As Automotive News put it last year, “Solid state may just have the magic formula that enables an almost seamless transition from internal-combustion engines to electric motors.”
Toyota is far from the only company working toward solid state. But its dominance in hybrids suggests it should have an edge in battery development going forward. That edge hardly seems priced into Toyota stock.
Toyota Stock Provides Growth and Value
Again, there just seems to be a nice combination backing the stock at current levels.
Toyota stock is assigned only a modest premium to legacy ICE automakers, despite better recent performance. In terms of earnings and revenue multiples, it trades at a staggering discount to TSLA and NKLA, even though Toyota too will be a big part of the future of electric vehicles. (In fact, Tesla’s market capitalization is only $15 billion less than that of Toyota at this point.) Toyota’s long history of innovation means it may well be competitive in self-driving cars as well.
The next couple of quarters will be difficult, but that’s no surprise. A 9% decline in the stock so far this year prices in at least some of that pressure.
Taking the long view, as investors should, makes the bull case clearer. Toyota stock is priced as if its growth is over. Its hybrid business and battery potential suggest that’s highly unlikely to actually be the case.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.