Toyota Stock Has Only 5% Upside After Recent Rally?

[Updated 11/19/2020] Toyota Motors Update

Having gained more than 28% since the March 23rd lows, Toyota Motors’ stock (NYSE: TM) has only 5% upside left. TM’s stock has rallied from $111 to $142 off the recent bottom compared to the S&P 500 which moved 60%. The company has seen a steady revenue rise over recent years, and its P/E multiple has risen. We believe the stock, after the recent rally, is close to its near term potential. Our dashboard ‘What Factors Drove 15.9% Change In Toyota Motors Stock Between 2018 And Now?‘ has the underlying numbers.

Due to the Covid-19 crisis, Toyota Motors, one of the world’s largest automobile companies, has seen its revenues fall by 26% for the first six months of the year compared to the same period in the previous year. In Q2 2021 (ended Sept 2020), Toyota reported earnings of ¥225.21 while total revenues were recorded at ¥6774 billion, down 11% y-o-y. Further, the company reported ¥1290 billion in cash inflows from operating activities for the first six months.

We expect Toyota Motors’ revenues to remain flat at around ¥29,930 billion for FY 2021 (FY ends in March). Further, its net income is likely to fall by 5% y-o-y, decreasing the EPS figure to ¥723.27 for FY 2021. Thereafter, revenues are expected to touch ¥30,542 billion in 2021, mainly driven by recovery across segments after the pandemic subsides. In addition, the EPS figure is likely to improve to ¥743.24, which coupled with the P/E multiple of 21.8x and a yen to dollar exchange rate of $0.01 will lead to Toyota Motors valuation around $150.

[Updated 06/26/2020] Looks Like Toyota Stock Has Reached The End Of The Road After It’s Recent Rally

Toyota Motors’ stock (NYSE: TM) has bounced back more than 15% since falling to $111 on March 23 to reach its current level of around $126. Notably, this compares to the 36% growth in the S&P 500 over the same period. We believe Toyota now has limited upside potential. The key is the company’s stock is 12% higher compared to the end of FY 2019 (FY ends in March).

Some of this rise of the last two years is helped by the roughly 5% increase seen in Toyota Motors’ revenues from FY 2018 to FY 2020 but offset by the Net Income margin, which fell from 8.5% in 2018 to 6.9% in 2020. The earnings growth, on a per-share basis, was lower -9.8%, slightly offset by share buybacks. Specifically, the company has invested about $12 billion in repurchases from 2018 to 2020, resulting in about 5% lower outstanding shares. While Toyota Motors did have about $39 billion in cash as of the last report, we believe it will likely be challenging for the company to sustain this level of buybacks till the coronavirus pandemic situation gets clear.

Finally, Toyota’s P/E ratio grew from about 8x at the end of FY 2018 to 9x at the end of FY 2020 and has remained at that level over recent months. Under the current situation, there is a limited upside for Toyota’s multiple when compared to levels seen over recent years.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. More than 35% of Toyota’s total revenue comes from the US region, which is worst impacted by the outbreak. Lower consumer spending and consumption would lead to lower demand for automobiles. These factors are bound to hurt Toyota’s revenues. We believe Toyota’s Q1 2021 results will confirm the trend in revenues as the Americas and Europe will show negative growth. It is also likely to accompany a clearer Q2 as well as FY’21 guidance.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

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