Down 20% Over The Last Month, Is Toyota Stock Attractive?

Toyota Motor Corp’s (NYSE:TM) reasonably strong set of Q1 FY’25 results last week, with profits rising to 1.33 trillion yen ($8.9 billion), up from 1.31 trillion yen the same period a year ago, while revenue came in at 11.8 trillion yen ($79 billion), up 12% compared to the last year. While Toyota’s profits have been boosted by a weak yen with vehicle sales rising in international markets, the company’s Japanese business took a hit due to a scandal that stalled production for a couple of months on account of irregularities in documentation for certification approval for certain models.

Despite the reasonably strong results, Toyota stock has declined by close to 18% over the past month. In comparison, U.S. rival GM (NYSE:GM) stock has declined about 12% over the same period. There are a couple of factors that have impacted Toyota of late. Firstly, the yen appears to be strengthening recently, rising by close to 10% over the past month as the Bank of Japan raised a key interest rate. Moreover, concerns about the U.S. economy following weaker-than-expected jobs figures have also weighed on the stock. Toyota’s shipments have also been slowing, with the company delivering  2.25 million vehicles during the latest quarter, down from 2.3 million vehicles last year. For the full year FY’25, which began in April, Toyota is projecting that its revenues could contract by about 2%, while net profits could drop by 27.8% to 3.570 trillion yen (about $23 billion) on account of higher material prices and labor costs. Research and development expenses are also expected to rise as the company looks to invest in areas such as artificial intelligence and automotive software.

TM stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $165 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of TM stock with respect to the index has been lackluster. 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 heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the mega-cap 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?

The near-term outlook for Toyota appears mixed with growth expected to cool. However, Toyota could stand to gain from the slowdown in the EV market. EV sales have been slowing as issues including high prices, concerns about range, and a lack of charging infrastructure have been impacting demand growth. Now, customers are increasingly opting for hybrid models, which offer higher economy compared to standard gasoline vehicles, without the range-related worries that come with EVs. This is advantageous for Toyota, which has been a laggard of sorts in the EV market, but remains a market leader in the hybrid space.  For instance, Toyota’s electrified vehicle sales (which consist primarily of hybrids) rose by 24% year-over-year to 1.075 million units in Q1 FY’25. Toyota’s valuation is also attractive. The stock trades at under 8x 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 $212 per share, about 25% 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 Toyota Revenue for more details on Toyota’s key revenue streams.

[1] Returns as of 8/8/2024
[2] Cumulative total returns since the end of 2016

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