Toyota Bets On Extreme Ends Of The Auto Market On Its Way To $90

Toyota Motors (NYSE:TM) is stepping up its focus on the extreme ends of the auto market i.e. luxury cars on the higher end of the spectrum and cars for the more price sensitive consumers at the lower end. Lexus, the premium car brand of Toyota, will unveil a new concept car at the Paris auto show. In addition, it will also showcase the new LS 600h F Sport for the first time in Europe. ^[1]

Lexus sales blazed past that of BMW and Mercedes-Benz in August to claim the No.1 spot in the luxury car segment in the U.S. The brand sold 24,237 vehicles in August, up 34% y-o-y. Sales at the start of the year were negatively affected by supply chain and production constraints witnessed by the automaker caused by the tragic natural disaster in Japan last year; hence Lexus trails Mercedes-Benz and BMW in year-to-date sales of luxury vehicles. The U.S. luxury segment is heating up with Cadillac revamping its line-up and aiming to be No.1 premium car brand in the U.S. within three years.

Although premium car sales only make up a small percentage of total vehicle sales, their contribution to overall revenue is much higher due to their higher pricing. Moreover, luxury cars usually have higher margins, so a healthy sales mix certainly helps the automaker in maintaining the desired margins. The Toyota stock is up 20% since the start of the year as a strong Q1 helped the company raise its full year guidance to 9.76 million Toyota and Lexus vehicles in fiscal 2012, around 2.5% more than the previous forecast.

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In the lower end of the strata, the Japanese automaker plans to invest around $160 million in its Bangalore facility in India by March 2013 to ramp up production to 310,000 units annually, up from 210,000 presently. ^[2] Most of the investment will be dedicated to increasing the production of its entry level hatchback/sedan Etios and the entry level SUV called Innova. The plant will also be used to supply transmissions and other components to its Brazilian operations. ^[3] With a greater focus on building cars suited to the needs of the customers in emerging economies, Toyota hopes to generate 50% of its total vehicle sales from developing markets by 2015, up from 45% in 2011.

We currently have a $90 price estimate for Toyota’s stock, which is about 10% higher than the current market price.

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1. Lexus Concept car to be unveield in Paris this month: Beats Mercedes and BMW in August car sales, September 10, 2012, rushlane.com [↩]
2. Toyota to invest Rs 900 cr to increase production in India, September 6, 2012, economictimes.com [↩]
3. Toyota’s Etios unit moves from learning to teaching curve, August 29, 2012, thehindubusinessline.com [↩]