Toyota Has Become an Anti-Tesla. It's Paying Off. -- Barrons.com

By Jack Hough

Toyota Motor stock has outperformed Tesla by 90 percentage points over the past year, raising two questions: Really? And, What the...? Let's tackle those in order.

Yes, really. Tesla stock has been locked in a long skid, declining 46% over the past two years, including 6% over the past year. Electric vehicles are losing buzz. Mizuho Securities just cut its 2024 EV growth projection to 15% from 25%. EV inventories look bloated, and affordability remains a challenge, it says.

Early adopters already drive EVs, and the next buyers are more cost-conscious. China is leading the way on cheap EVs, with BYD recently passing Tesla on volume. Tesla has slashed prices but says it is reaching natural limits of cost reduction on current vehicles. It will introduce a small sport utility vehicle in mid-2025. Its top-selling Models 3 and Y were first introduced in 2017 and 2020, respectively.

That has created an air pocket for growth. Wall Street currently predicts two million vehicle deliveries this year, up 12%. Two years ago, the 2024 consensus was 2.7 million vehicles. Free cash flow this year is pegged at $4.5 billion, up 4%. Back in late 2022, forecasters expected 2024 free cash flow of more than $17 billion. Mizuho recently cut its rating on Tesla stock to Neutral from Buy. Only a third of analysts who cover Tesla stock remain bullish.

Whereas Tesla recently traded at more than 60 times this year's projected earnings, Toyota goes for 11 times, even after a 115% gain over the past year. That's for the shares that trade in Japan; the American depositary receipts are up 84%, dented by the weakening yen, which recently hit a 34-year low versus the dollar.

Toyota has turned into something of an anti-Tesla. It was an early mover on hybrid vehicles -- the company's Prius has been profitable for more than two decades. But when other car makers followed Tesla's lead by investing billions in ambitious EV programs, Toyota mostly stuck with its hybrid strategy. That appears to be paying off. Hybrid vehicles have been outpacing EVs -- a "tidal change," according to J.P. Morgan analyst Akira Kishimoto, who calls Toyota his top stock pick. He predicts 22.6% hybrid growth this year, fueled especially by small SUVs, where Toyota's RAV4 dominates.

Toyota and its sibling brand Lexus get more than a third of revenue from hybrids, versus a minimal contribution from EVs. This year, Toyota will roll out its U.S. Camry sedan in hybrid versions only. Fuel efficiency there is expected to top 50 miles per gallon -- an affront to plug-in purists but fine for those who aren't ready to make the switch. For Toyota, there are no upfront losses and uncertain recovery period required; it earns higher profits on hybrid vehicles than nonhybrid ones.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 29, 2024 03:00 ET (07:00 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.