With Hybrid Sales Surging, Is Toyota Stock Attractive At $230?

Toyota Motor Corp (NYSE:TM) stock has seen a big rally this year, rising by about 18%, compared to the broader S&P 500 which remains up by just about 9%. There are a couple of factors driving the stock higher. Now, the broader Japanese stock market indices have been among the better-performing in the world driven by corporate governance overhauls and an increasing focus on shareholder returns. Easing commodity prices and supply chain-related issues are also helping automotive stocks in general. Toyota’s Q4 FY’24 results were also better than expected, with operating profit surging 78% for the quarter. The gains were driven in part by a weaker yen, which makes Toyota’s products more competitive overseas. 

Separately, demand growth for electric vehicles has been slowing as issues including high prices, concerns about range, and a lack of charging infrastructure have been impacting demand growth. This is a big positive for Toyota, which has largely dragged its feet in the EV space. Customers are increasingly opting for Toyota’s hybrid models, which offer higher economy compared to standard gasoline vehicles, without the range-related worries that come with EVs. For instance, Toyota’s electrified vehicle sales (which consist primarily of hybrids) rose to 3.8 million units over the fiscal year ended March 31, 2024, a 35% increase compared to last year. These vehicles now account for 37.4% of Toyota’s overall sales.

Now, TM stock has seen strong gains of 40% from levels of $155 in early January 2021 to around $220 now, vs. a similar change for the S&P 500 over this roughly 3-year period. However, the increase in TM stock has been far from consistent. Returns for the stock were 20% in 2021, -26% in 2022, and 34% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

So is Toyota stock a buy at current levels of about $232 per share? The near-term outlook for Toyota appears mixed. For FY’25, which began in April, Toyota is projecting that profits could drop by  28% to 3.570 trillion yen (about $229 billion) on account of higher material prices and labor costs as well as rising research and development expenses. Revenue growth is also poised to ease to just about 2.0% as the global economy cools. However, Toyota stock trades at just about 10x forward earnings, which we believe is a reasonable valuation, given the company’s edge with hybrid vehicles and its thicker margins versus other mass market manufacturers. We value Toyota stock at about $248 per share, 15% ahead of the current market price. See our analysis of Toyota Valuation for more details on what’s driving our valuation for Toyota. Also, see our analysis of Toytota Revenue for more details on Toyota’s key revenue streams.

[1] Returns as of 5/14/2024
[2] Cumulative total returns since the end of 2016

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