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Kicking TM’s tires

Market Commentary courtesy of Ockham Research.

Kicking the Tires of Toyota Motor

The American Depository Receipts (ADRs) of Toyota Motor (TM) stock have fallen 30% from their 52 week high as the difficult sales environment in the U.S. took a toll on the company’s fiscal 2007—which ended in March. The company modestly missed its own guidance for total vehicle sales for the year (it had projected sales of 8.93 million units and actually sold 8.913 million). Not only was the sluggish U.S. economy a problem, the stronger yen and inflation in raw materials played havoc with the final numbers. CropperCapture[13]

2008 appears to offer much of the same for Toyota, which is on the cusp of overtaking General Motors (GM) as the world’s largest auto maker. The established U.S. and European markets offer little promise for the foreseeable future as those economies continue to struggle. Demand in emerging markets, particularly in Asia, remains robust. Raw material costs are unlikely to abate this year, although there is some hope that a softer global market may eventually offer some relief there. Toyota management is taking aggressive steps to streamline materials purchasing in order to try to counter the effects of inflation in that critical component of its business and the company does set the industry standard for efficiency.

Ockham Research currently has a very favorable rating on Toyota Motor as the stock’s price erosion has brought it down to a level that is exceptionally appealing to patient, long-term investors. Problems plaguing GM, Ford and Chrysler in the U.S. will help Toyota to boost its American market share when the auto/truck market improves domestically. Also, Toyota continues to produce an impressive mix of products that retain their appeal to many different segments of the market, unlike the American auto makers who found their production and inventories heavily skewed to formerly-more profitable trucks and SUVs when skyrocketing gasoline prices cratered (probably permanently) that market throughout 2008. Toyota still produces a wide variety of vary appealing fuel-efficient vehicles, sales for which have helped to offset the decline in truck and SUV sales in the U.S.

All automakers, including TM, face a rocky few years—especially in the important U.S. market. However, Toyota is positioned very nicely to benefit from missteps by domestic manufacturers in the U.S. The growing success of Toyota racing teams in the iconic American sport of NASCAR is a metaphor for the rise of the company’s fortunes both in this country and around the world. Using our valuation metrics, TM shares are worthy of investor consideration at current levels. TM’s historic price-to-sales range is .67 – 1.04 and the stock is currently trading at .59x. Its price-to-cash flow historic range is 5.89 – 9.09 and the stock currently trades at 5.05x. With TM ADRs currently trading just under $90, the stock is almost 20% below the level we would expect it to trade at if TM ADRs merely returned to the low end of their historic trading range. As the company gains market share around the world versus weakened competitors, we would expect the shares to merit at least this level of movement.

Ockham Research Staff @ July 30, 2008

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