U.S. Markets close in 4 hrs 2 mins

Toyota Doing Well, but How Much More Debt Can the American Consumer Consume?

- By Holmes Osborne, CFA

Toyota Motor Corp. (TM) released its fourth-quarter and full-year 2018 numbers on May 8. While sales are slightly up, earnings are down.

The company is focusing on emerging markets and using common auto parts for its cars. Unfortunately, the number of Americans delinquent on auto payments over 90 days is on the rise. Toyota has a fortress-like balance sheet with a huge portfolio of cross-holdings. The cost of a new car and length to finance it has greatly increased over the years. This could cut into the company's sales and stock if the American buyer runs out of purchasing power.


The stock trades for $118.14 per share and the market cap is $174 billion. Diluted earnings per share are $16.36 and the price-earnings ratio is 7.22. The dividend is $3.52 and the dividend yield is 3%. So far, that's a pretty cheap stock based on these metrics.

Sales grew from 27.2 trillion yen in 2015 to 29.4 billion yen in 2018. Not exactly growing like a weed, but at least there's some growth there. Earnings grew from 2.17 trillion yen to 2.48 trillion yen. Management has been able to contain costs with this small growth. In the most recent fiscal year, sales came in at 30.2 trillion yen and earnings were 1.88 trillion yen. Looks like costs finally caught up to cut into earnings.

According to its annual report, 24% of Toyota's automobiles are sold in Japan, 30.3% in North America, 9.6% in Europe, 16.6% in Asia and 19.5% in the rest of the world. Vehicle sales account for 78% of revenue, parts for 9% and financing, 6.5%. We'll talk more about financing later.

Morningstar's analyst notes that Toyota's long-term goals include making more compact cars for emerging markets and having vehicles share 70% to 80% of common parts. The common parts idea is very interesting. Imagine all Toyotas having the same knobs, handles, radios, engine parts, drive trains, etc. This is a good idea to cut down on costs. Morningstar has a target price of $132 due to the firm forecasting a stronger yen.

Morgan Stanley noted in the most recent quarter that earnings were operated by product quality costs, but the company is still solid in terms of volume mix and cost reductions. The company estimates it will sell 45,000 fewer autos in North America, but Morgan Stanley thinks that is overly conservative. Morgan Stanley thinks the stock is fairly priced.

The company plans to buy back 50 million shares this year. I'm leery of buybacks when the stock market is at an all-time high. Japan's market isn't at an all-time high, but I'd guess Toyota will follow the U.S. where so much of its profit is derived.

The most recent balance sheet shows $9.6 billion in cash and $7.8 billion in receivables. Approximately 15,829.9 billion yen of financing receivables were on the balance sheet as of March 31, 2018. Half of these receivables were derived in the U.S. The liability side showed $2.1 billion in payables and $18 billion in debt.

What is interesting about Toyota (and other Japanese companies) are cross-holdings. Toyota owns 25% of Toyota Industries and Toyota Industries owns 7.97% of Toyota (worth $13.9 billion). Toyota owns the following companies: Toyota Industries (TYIDF) 25% ($4.41 billion), Denso (DNZOY) 25% ($7.73 billion), Aisin Seiki (ASEKY) 25% ($2.35 billion), Toyota Tsusho 22% ($2.3 billion), Toyoda Gosei 43% ($1 billion). So this portfolio of stocks is worth about $31.69 billion. Wow! That's amazing.

What has worried me about auto is the financing. So many millions of people are in debt up to their eyeballs. Data from the New York Federal Reserve shows that seven million Americans are over three months behind on auto payments. The average amount financed for a car is $31,707 and the average loan length is 69.1 months. Incredible!

I sold cars as a summer job about 25 years ago. Sure there were some expensive Toyotas, such as fully-loaded 4 Runners, but nothing like the costs today. Furthermore, we almost never financed a car beyond 60 months. Why? We were afraid the buyer would be paying on it forever (not literally). Also, at the end of five years, your car isn't worth much. Now the norm is to finance for six and seven years!

When I first started selling cars in the summer of 1994, you could get a basic truck (two-wheel drive with no frills) for about $10,000. The fanciest car on the lot was a Supra at $48,000. It sat there all summer until someone with the dough finally stepped up. I bet one-third of Toyotas on the lot today cost more than $48,000.

What happens when the American consumer runs out of debt and can't buy a new car (or one that costs $31,000)? Auto manufacturers take a hit. Subprime auto delinquencies are reaching 2009 lows!

Toyota is an awesome company. It will survive a depression, recession, compression, whatever you want to throw at it. It can sell off stock in the other auto companies it owns and has plenty of cash. Now, am I going to buy shares? I'm not interested, but the price is cheap.

Disclosure: We do not own the stock.

Read more here:



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here

This article first appeared on GuruFocus.