Does This Auto Company Still Represent Quality?

With shares of Toyota Motor (NYSE:TM) trading at around $102.64, is TM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Negative events that are temporary in nature often lead to the best buying opportunities. Look at the earthquake in Japan in 2011 as an example. Toyota’s stock suffered, but whoever got in around that time has done quite well. The best brands usually bounce back, and whether you prefer American cars, Japanese cars, or something else, it can’t be denied that Toyota is a top-tier brand. For example, would you feel more comfortable driving cross-country in a Ford with over 200,000 miles on it or a Toyota with over 200,000 miles on it?

Regardless, there are many bullish signals for Toyota right now. One is that the new Japanese government is devaluing its currency to fight deflation. This will lead to stronger exports. Toyota will have an opportunity to cut costs and cut prices, which should lead to increased market share. Other positives for Toyota include strong demand for the Prius and Camry, strong cash flow, and a new management team that is focused on catering more to the American consumer. However, there are also negatives, which include the expiration of Japanese tax credits late last year, reduced sales in China due to political tension between Japan and China, and stiff competition, especially from Ford Motor Co. (NYSE:F).

Toyota plans on launching 20 hybrids over the next three years as well as one hydrogen fuel car. It’s yet to be determined whether this will act as a positive or a negative, but it does show that Toyota is making a strong effort to stay ahead of the curve.

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The chart below compares fundamentals for Toyota, General Motors (NYSE:GM), and Ford. These three companies differ in size. Toyota has a market cap of $162.00 billion, General Motors has a market cap of $37.78 billion, and Ford has a market cap of $51.48 billion.

TM

GM

F

Trailing   P/E

16.58

9.48

9.22

Forward   P/E

13.37

6.33

7.81

Profit   Margin

3.51%

4.06%

4.22%

ROE

7.94%

16.15%

36.10%

Operating   Cash Flow

 $30.85 Billion

$10.60 Billion

$9.04 Billion

Dividend   Yield

1.30%

N/A

3.00%

Short   Position

N/A

7.50%

1.60%

 

On a fundamental basis, Toyota looks good, but Ford looks even better. Let’s take a look at some more important numbers prior to forming an opinion on Toyota.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Toyota is moderately weaker than the industry average of 0.80, but it still qualifies as normal. Toyota is much stronger than Ford in this area. However, General Motors is the most impressive.

Debt-To-Equity

Cash

Long-Term Debt

TM

1.10

$35.57 Billion

$165.78 Billion

GM

0.43

$26.12 Billion

$16.05 Billion

F

6.44

$24.42 Billion

$105.06 Billion

 

T = Technicals Are Strong

Toyota has outperformed General Motors and Ford over the past year as well as year-to-date. Toyota has also been a clear winner when it comes to all-time stock performance.

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1 Month

Year-To-Date

1 Year

3 Year

TM

0.01%

10.04%

19.36%

30.97%

GM

2.39%

-3.57%

10.54%

N/A

F

4.36%

2.37%

9.19%

-2.57%

 

At $102.55, Toyota is trading above all its averages.

50-Day   SMA

101.02

100-Day   SMA

93.98

200-Day   SMA

86.28

 

E = Earnings Have Been Steady               

Revenue has been sporadic, but it has remained in a somewhat predictable range. Earnings had been improving until a setback in 2012. This has been a relatively common trend throughout the broader market.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

262.39

209.00

203.69

228.43

226.11

Diluted   EPS ($)

10.78

-2.84

1.44

3.14

2.20

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and an increase in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

62.58

61.21

69.37

69.68

61.43

Diluted   EPS ($)

0.66

0.87

2.32

2.10

0.72

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

United States auto sales are expected to increase. The housing market fuels everything. As long as the housing market continues to improve, automobile sales will improve. However, easy credit and low interest rates is exactly what led to trouble last time. Therefore, it’s possible that the same result should eventually be expected. That’s up to the reader to determine.

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Conclusion

This industry is extremely sensitive to the status of the global economy. As long as the economy remains in bull mode, Toyota is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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