Toyota Motor Is a Value Trap
- By Jonathan Poland
Toyota Motor Corp. (TM) is the world's largest automaker with a market capitalization north of 200 billion, greater than Ford (NYSE:F), General Motors (GM) and Honda (HMC) combined. It sold 10.4 million units in the last fiscal year under brands that include Lexus, Daihatsu, Hino and its namesake Toyota. The company has close to 50% of the market share in Japan, yet just 14% here in the U.S. The company also owns nearly 25% of parts supplier Denso, an impressive organization in its own right with $48.1 billion annual sales turnover.
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The intrinsic value of TM
With over 1 billion automobiles in the world, and a global population approaching 8 billion on its way up to 11 trillion by the end of the century, the desire for new and better cars, trucks and SUVs will only grow over time.
However, despite being ultra-efficient and wildly profitable, the company's market capitalization reflects an overvaluation compared to its peers.
Toyota
Sales: $264 billion
Profit: $22.45 billion
Market: $180 billion
Honda
Sales: $139 billion
Profit: $9.75 billion
Market: $55 billion
Ford
Sales: $158 billion
Profit: $6.4 billion
Market: $39 billion
GM
Sales: $144 billion
Profit: $6.0 billion
Market: $51 billion
Collectively, Honda, Ford and General Motors produce about the same amount of profit as Toyota and $177 billion more in total sales, yet these companies' combined market cap is $35 billion less.
Investors could see that as an advantage for Toyota because, with its scale, it can do things these other companies cannot, but I see it as a liability, especially with such a large portion of the Japanese market. What's more, with the stock trading at 8x forward earnings, it may seem like a value trade. It's not.
In the last decade, even at the bottom of its trading range, the best total return is 100%. That equates to roughly 7% annualized returns. Now, priced at $200 billion, how much higher can it go? Automobiles are a commodity business and Toyota's brand isn't any better than Ford or GM.
Environmental laws are getting stricter, which will make cars more expensive to produce and more expensive for consumers to buy, driving demand for used cars over new. And, with the auto industry suffering from overcapacity, Toyota will only experience greater pricing pressure making it difficult to maintain its high economic profits.
Hybrids are expensive, so Toyota must ensure its combustion engines remain competitive. Toyota believes hydrogen fuel cell vehicles rather than battery electric vehicles will be the way the industry moves long term, but that belief will be extremely costly if the company gets it wrong. By the time Tesla and the major U.S. automakers get electric right, Toyota's market share could dwindle substantially.
Granted, the company does have Lexus and its parts supplier, Denso, which will prop it up during the next recession; however, the stock will likely still fall by 25-50% when that comes. At that point, other stocks will be much cheaper and provide much greater long-term potential than Toyota. Sure, some may point to the dividend as the reason for investment, and if you're happy with 3%, which may grow to 6% in the next decade, then absolutely, Toyota is worth an investment. However, don't expect that investment to keep pace with the market as a whole.
Disclosure: I am not long/short any stock mentioned in this article.
This article first appeared on GuruFocus.
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The intrinsic value of TM
