Are Investors Souring on Toyota?

Despite the ability of Toyota (NYSE:TM) to overcome recession, recall, and a natural disaster, investors are now less enthusiastic about owning shares in the company than they were before 2007.

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Increasing competition has taken a toll.  Even though the company’s net income jumped to $3.7 billion for the last quarter and its $140 billion stock-market value is greater than both Honda (NYSE:HMC) and Volkswagen, Toyota shares are still not valued as highly as they were before the resurgence of the United States’ automobile industry.

Toyota has lost its advantage.  No longer can the auto-manufacturer claim the top quality ratings it once did. J.D. Power & Associates’ annual study of new-car quality, the study which established the reliability of Toyota and Honda in the United States, gave U.S. automakers Ford (NYSE:F) and General Motors (NYSE:GM) their best scores in history.  Toyota lost its quality lead against Korean automaker Hyundai as well.

“Hyundai is rapidly gaining ground in various markets of the world, and the gap between people’s impression of hyundai and toyota is narrowing,” said chief executive officer of Tokyo-based Fukoku Capital Management Yuuki Sakurai.  “Hyundais’ s cars are now highly valued for their design and quality, not just competitive pricing.”

However, Toyota has created an even bigger problem for itself: in order to keep greater control over quality, the company has decided to increase manufacturing in Japan, even though the strengthened yen reduces profit on North American sales.  As the Japanese currency has strengthened 45 percent in the last few years, a stronger yen makes it more difficult for companies to make vehicles in Japan and sell them profitably in the United States.

“We went through an economy that tanked; an industry that dropped 40 percent; a recall crisis; and all the natural disasters, one after another,” global marketing chief for Toyota’s luxury Lexus brand Mark Templin, said in an interview in California, last month. “But the biggest challenge we face, that we’ve ever faced, is the currency.”

Furthermore, investors are willing to pay more than twice as much for shares of Hyundai, which boasts 12 percent more relative to earnings before interest, taxes, depreciation and amortization.

New York-based Toyota spokesman Steve Curtis declined to comment on the change in the relative value of the carmaker’s shares.  “Our view is that the best way to build shareholder value is to focus on satisfying our customers,” he said.

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