Toyota Motors Stock: Take Advantage Of The Japan Crash

seekingalpha08-09

Toyota Motors stock has dropped due to the Japanese carry trade and yen appreciation, presenting a buying opportunity.Toyota's strong reputation for quality and durability, along with recent earnings ...

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flash crash Data by YCharts One of the largest TOPIX core 30 components and possibly the most ubiquitous Japanese stocks, Toyota Motors (TM) has been brought down into the drudges along with the Japanese \"carry trade.\" My basic understanding of the trade is that hedge funds borrowed at near zero in Yen and used the proceeds to buy Japanese stocks and other assets around the world. As variable rates start to increase along with the appreciation of the yen, the repayment denominated in yen becomes increasingly expensive. On top of that, if your purchased assets in said currency start tanking, it can cause a cascading panic of needing to exit. The BOJ key rate was raised July 31st and the Yen took off along with it: xe.com This has subsided a bit after the BOJ announced they would not be hiking again during market volatility. This will give stocks in Japan a chance to rebound and a chance for traders to slowly exit rather than abruptly. While the downside in Japanese stocks may not be over yet due to the near-to-mid-term known trajectory of rates in Japan, it's also hard to grab an absolute bottom. With Toyota Motors being a stock I owned back in 2021 at worse valuations than today but nearly the same price, this smells like a bargain to me. I believe Toyota Motors is a strong buy. An appreciating yen Being a Toyota loyalist, I know to check my VIN for the letter J preceding the trailing digits. This means the vehicle was made in Japan. They are becoming more and more rare stateside, with only the Toyota 4runner, RAV 4 hybrids, Corolla, and Land cruiser being still made in Japan. The Lexus GX is also made in Japan. You do run into an odd J VIN here and there for models outside of the Trucks, but for the most part, the Toyotas you buy here are made in America. The Yen appreciation can therefore be of great benefit to the top line. Import costs/losses[should they choose to not increase the price of Japanese-made models] should be minimal with the majority of the fleet being made here for US consumers. On the flip side, the Japanese sales being denominated in Yen will print back at higher dollar-denominated levels as we go forward. Win/win. Auto brands worldwide by quality and reputation Motortrend's #1 and #2 most reliable car brands for 2024 are Lexus and Toyota, with Lexus at 1 and Toyota at 2. This isn't a shock to anyone that has owned one of these vehicles, their durability is unmatched. It has become almost a badge of pride to own the late 90s or early 2000s Toyota/Lexus with 500,000 to a million miles on it. I currently own one approaching 250,000 miles with almost zero issues over the life of the vehicle. Data by YCharts Correspondingly, you will find Toyota Motors amongst the highest sales generators in the sector every single year. While Volkswagen (OTCPK:VWAGY) may print higher, they are also a collection of ten European brands. No company besides Toyota can rival this level of long-term quality and sales growth without lots of acquisitions.  Recent earnings Toyota Motor Corporation (TMC) today announced its financial results for the first quarter, which ended June 30, 2024. TOYOTA CITY, Japan (August 1, 2024) — Consolidated vehicle sales totaled approximately 2,252,000 units, a decrease of approximately 74,000 units compared to the same period last fiscal year. On a consolidated basis, net revenues for the period totaled 11.837 trillion yen ($75.9 billion), an increase of 12.2%. Operating income increased from 1.120 trillion yen ($8.2 billion) to 1.308 trillion yen ($8.4 billion), while income before income taxes 1 was 1.872 trillion yen ($12.0 billion). Net income 2 increased from 1.311 trillion yen ($9.6 billion) to 1.333 trillion yen ($8.5 billion). So here we have a decrease in units sold but an increase in revenues, this is a great measure of inflation and its effect on the economy. Even though individuals for the quarter bought fewer cars, they paid more money on average. Corresponding net and operating income increases year over year were also notable and show that margins are increasing. The margins may not hold up in a recession as manufacturers now seem to be passing along costs to consumers at the old underlying cost of goods sold inflation numbers. If volume drops even further, price cuts may be in line but affordable due to the margins: Data by YCharts A recession may benefit the brand Trading down is a term that the market likes to use in a recession. Again, being a Toyota lover that verbiage is akin to blasphemy to me, but I understand the logic. Toyotas price point-wise are both cheaper on average and more durable than US and European competition. While Korean brands have come on strong as of late, I believe Toyota remains the beacon of light in the world when you want to buy something that is going to work and not cost you an arm and a leg in maintenance. If times get tough, and you need a new vehicle, I have little doubt that Toyota will be the first thought that crosses the minds of the masses. Percent off high with an all-time high not long ago Data by YCharts Let's not forget that Toyota Motors was one of the best performing stocks in the market not all that long ago. The stock crossed $250 a share in March of 2024. Off high Data by YCharts The stock has now crashed down to under $170 really quick, without a material deterioration in Toyota's fundamentals. This is an ideal situation. Heat check Data by YCharts Be it Peter Lynch or George Soros, any good stock thesis of theirs started out with tracking trends in earnings per share to the appreciation in share price. Again we see the price action in Toyota tracked EPS growth until this recent drop. Now the shares are trading under even the revenue growth line on a 10-year basis. There has not been a gap this large between earnings growth and price growth at any point on the chart in the previous 10 years. Data by YCharts We can also see on a three-year basis that Toyota has had the strongest EPS growth of the major auto sector stocks. I chose this slice as the cyclicality of the industry shows outsized growth rate spikes due to several instances of negative earnings for the rest of the group while Toyota has been more of a steady but slow grower. Tesla has superior numbers, but I left them out as they are a pure EV player, a space that Toyota has avoided. Basic value numbers   Seeking Alpha Toyota is trading at a discount on almost every valuation metric in the sector. With a forward P/E of 8 X for the highest revenue-generating singular auto brand [not a group], I feel that the disconnect between the Japanese market crash and the global reality of Toyota sales creates almost a layup-type mismatch. This price may last awhile, as hedge funds exit Japan or otherwise find better ways to recapitalize their Japan carry trade. I will be adding every chance I get at these levels. Valuation based on the Graham Number One of my favorite ways to look at large tangible asset company value is to use the classic Graham Number Formula as laid out in the Intelligent Investor as a rough guide on how to find a fair price. Now that many companies can generate substantial returns on small amounts of assets, this valuation model is really limited to heavy industrial companies that have a lot of hard assets and a low ROA.  Graham advised to buy stocks only when the P/E times the P/B did not cross his magic number of 22.5. The price target model to find a fair price is the square root of EPS X Book Value Per Share X 22.5. Toyota has 1.34 Billion shares outstanding TTM and $228.63 Billion in net assets. Data by YCharts The book value per share is right at the current trading price of $169.26 per share. Therefore, the current price to book value is very close to 1. This is close to in line with peers in this group ex Tesla (TSLA): Data by YCharts Using this data to draw up a fair price model, we also need the EPS estimates: Seeking Alpha With March 25 estimates at $21.5, we now have our inputs.  Book value $169.26 EPS estimates FWD $21.5  Thus, SQRT 21.5 X 169.26 X 22.5 = $286.14 Using a 20% discount buffer gets us to $228.91 / share. I don't usually draw out the steps of the model at this length, but the Japanese Yen to Dollar conversions can make the valuation screeners a tad wonky. In short, Toyota Motors is cheaply valued even at a 20% discount to its Graham Number intrinsic value by about 30%. Balance sheet Data by YCharts Toyota has ample debt, but ample equity as well. The debt to equity ratio only stands at 1.089 X which is really good amongst its peers: Data by YCharts Only Tesla has a better ratio being that they have been able to raise equity as a \"tech\" company versus an automotive one with Volkswagen operating close to as conservative of a balance sheet in the sector. General Motors (GM) and Ford (F) are more levered. They all have financing arms which makes for some of the way the sector balance sheets operate. Future catalysts One of the future catalysts I love is that Toyota never went full-on EV. They have a couple of models in limited production, namely the bZ4X. A name so crude that it could have only been designed to both A, test out EV capabilities; and B, make sure no one really wanted to buy it so they wouldn't have to produce many. All jokes aside, Toyota is one of the best hybrid players in the market without the forced EV-side conversion of capacity that many automakers are now going through. Soon, almost the entire Toyota fleet will be hybrid, even the Toyota 4 Runner coming out in the fall will be the first-ever hybrid version of the ultra-popular SUV. Panasonic JV and lithium batteries Even though Toyota seems to have dogged a bullet by not going full bore into EV production, they are still perusing lithium battery technology. In March, the company announced a takeover of the lithium battery JV to become a wholly owned subsidiary of Toyota Motors:  Japan's Toyota Motor will take over its joint venture with Panasonic Holdings, Primearth EV Energy (PEVE), and convert it into a wholly owned subsidiary, the automaker said March 5. The takeover is meant \"to strengthen its capabilities in mass-producing automotive batteries, Toyota said. \"The acquisition is scheduled to take place in late March.\" Toyota did not disclose the value of the takeover. Currently, Toyota controls 80.5% of PEVE while Panasonic owns 19.5%. PEVE is a Japanese manufacturer of prismatic nickel–metal hydride (Ni-MH) and lithium-ion (Li-ion) battery packs for hybrid EVs (HEVs) at Kosai, Shizuoka prefecture and Taiwa, Miyagi prefecture. \"In addition to HEV batteries, PEVE plans to begin producing batteries for BEVs (battery EVs) and PHEVs (plug-in HEVs),\" Toyota said. Domestically, PEVE has a production capacity of about 1.4 million units/year of Ni-MH battery packs and 200,000 units/year of Li-ion battery packs  This is a big catalyst if you believe in the future of EVs and hybrids as Toyota initially planned to sell batteries to end users in addition to Toyota in house use through this business. This creates an entirely new business for Toyota that is not vehicle sale-centric and an item that makes me very bullish on the long-term prospects of the company. To me, Toyota is the world standard for quality, if I want a top quality durable battery, Toyota would be my go-to. Risks Toyota is listed in Japan and is more affected by the Japanese market as it is only an ADR here on the New York Stock Exchange. More issues could arise in the Japanese carry trade. I would welcome more dips to accumulate, but it could be a bad stock for short-term or momentum traders. In my opinion, this is only a stock for the buy-and-hold investor at the moment. Safety scandal One of the sell thesis is that Toyota is embroiled in a controversy:  “Toyota Chairman Akio Toyoda apologized Monday for massive cheating on certification tests for seven vehicle models as the automaker suspended production of three of them.” United Press International says, “The company said the certifications involved data in pedestrian and occupant protection tests.” Toyota admitted to using timers rather than crash sensors to set off airbags, knowingly using the wrong crash angles for pedestrian safety tests, submitting data from the wrong side of the car in some pedestrian crash tests, and similar incidents “where testing methods differed from the standards defined by national authorities.” The suspect data, CNN says, came from “six different tests conducted in 2014, 2015, and 2020.” Some of the tests would have resulted in unrealistically promising safety performance. Toyota’s tests didn’t meet specifications in a handful because they were more stringent than government requirements. In one test, for instance, Toyota crashed a heavier sled than required into the rear of a car to test its rear-impact performance. What Cars Are Involved? Toyota and Lexus Only one of the Toyota models involved has ever been sold in the U.S. Toyota has halted production of three models – the Corolla Fielder, Axio, and Yaris Cross, over alleged test fraud. None of those are available here.  A few notes:  The tests appear to be fibbing on Toyota test standards which exceed government safety standards. Only one of models have been sold in the U.S., the most litigious country of all the end markets. This is being found across almost all the Japanese auto manufacturers.  I don't believe this scandal will have any effect on sales, the main risk is litigation and possible recall requirements. It could result in some additional unforeseen costs to these companies, but I can't imagine it influencing consumer purchases. Summary Even after stating my biggest risk factors and possible 2024 downward momentum, I still rate the stock a strong buy as a long-term investor. Here we get 2021 prices with 2024 fundamentals, basically growth in earnings and revenue since that time. I will be thumbing through other Japanese favorites in the coming days to see if anything else makes sense, but for now, Toyota looks like an excellent deal washed out in the Japanese stock market crash.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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