Can Toyota Cruise to Higher Prices?

Toyota has faced a challenging environment in the last few years. The devastating tsunami that hit the Japanese coast in 2011, low automotive demand, and recently unfavorable exchange rates have all stifled revenues and earnings for the Japanese automaker. However, the stock has advanced almost 35 percent since the beginning of the year. Can Toyota carry this momentum into the second half of the year? Let’s use our CHEAT SHEET investing framework to decide whether Toyota is an OUTPERFORM, WAIT AND SEE OR STAY AWAY.

C = Catalysts for the Stock’s Movement

Toyota’s bottom-line is extremely sensitive to fluctuations in the yen — every 1 yen change against the dollar affects Toyota’s profitability by an astounding $353.4 million. A weaker yen benefits Toyota’s sales, as around 75 percent of its cars go to overseas consumers.

Shinzo Abe has been somewhat of a savior to Toyota since his election last year. His aggressive stimulus plan has helped depreciate the yen by more than 20 percent against the dollar, leading to a 113.5 percent increase in first quarter earnings from the previous year’s quarter.

In the chart below you can see the strong correlation between Toyota’s rising share price and the depreciation of the yen. While the stock’s strong performance can also be attributed to other factors — such as rebounding auto demand — there certainly seems to be a pattern between movements in Toyota’s share price and the yen.

Favorable exchange rates aren’t the only factor helping Toyota’s earnings. Aggregate demand for vehicles has picked back up since the financial crisis. June auto sales increased 6.3 percent from last year, and were the strongest they have been since December 2007. Additionally, auto sales in China increase more than 10 percent last month. Toyota saw sales to its neighbor pick back up, following a temporary lull in sales caused by strained political relations between the two countries. Additionally, domestic sales in the U.S. are expected to grow at around 7 percent for the rest of the year. This is good news for Toyota as it heads into second quarter earnings.

E = Earnings are Increasing Year-over-Year

Toyota’s earnings have increased over the last 5 quarters. The most recent quarterly figure was $2.05, beating analysts’ estimates and showing substantial growth from the previous year’s same quarter earnings of $0.96. Toyota’s revenue declined around 11 percent in the first quarter — weak sales in China amidst political strife are still hurting revenues, but Toyota believes sales will improve there. Earnings have not been affected as much, with the company continuing to benefit from a depreciating yen. Toyota anticipates that net income will grow by 42 percent to $14 billion this year.

2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1
Qtrly. EPS $2.04 $0.73 $2.10 $2.31 $0.96
EPS Growth YoY 113.5% 9.74% 213.1% 25230.0% 387.0%
Revenue Growth YoY -10.59% -1.86% 16.55% 63.44% 23.05%

E = Excellent Relative Performance to Peers

Toyota’s chief competitors are Ford (NYSE:F), GM (NYSE:GM), and Honda (NYSE:HMC). While Toyota isn’t cheaply priced, and doesn’t offer an attractive dividend like its American counterparts, investors are really paying for the company’s high future growth prospects. Toyota’s PEG ratio — the ratio of the P/E to the expected future earnings growth rate of the company — is the most attractive among the group. Lower PEG ratios tend to suggest that a stock is undervalued, if it performs in line with its future earnings growth. While these future earnings are only estimates, Toyota’s low PEG ratio and high 2013 growth estimate are certainly bullish indicators.

TM F GM HMC
Trailing P/E 16.75 11.51 12.39 14.86
PEG Ratio 0.52 1.01 0.71 0.88
Growth Est. (2013) 19.3% 0.7% 1.5% 19.6%
ROE 9.09% 33.97% 15.2% 8.08%

T = Technicals on the Stock Chart are Strong

Toyota is currently trading at $129.29, well above both its 200-day moving average of $109.01, and its 50-day moving average of $120.68. The company has experienced a strong uptrend in the last year — up 70 percent in the last 12 months. Toyota is trading right around its 52-week high of $130.99 it achieved in late-May. Toyota’s relative strength index is flirting with 80, implying the stock may be overbought in the current, short-term period.

Conclusion

Toyota looks like it has put its worst days behind it, as Japan has largely recovered from the 2011 tsunami disaster, and the yen is at a more attractive rate for exporters. It looks like the weak yen is here to stay: Prime Minister Abe shows no sign of scaling back ‘Abenomics,’ and the U.S. dollar should appreciate as the domestic economy continues to strengthen. Additionally, increased global aggregate lightweight vehicle demand, as well as improved relations between China and Japan, should increase Toyota’s sales in the coming quarters. Even though Toyota trades at a relatively high price, its future earnings growth is very attractive. Look for Toyota to OUTPERFORM.

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