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  1. 1. Ticker: TM Toyota Motor Corp. Sector: Consumer Goods Industry: Auto Manufacturers- Major Company Profile Toyota Motor Corporation operates in the automotive industry Recommendation: BUY in Japan. The company has three segments: Automotive 100 shares Operations, Financial Service Operations, and Other Operations. Pricing The Automotive Operations segment engages in the design, Closing Price $126.23 (07/06/07) manufacture, assembly, and sale of passenger cars, recreational 52-wk High $ 138.00(02/27/07) and sport-utility vehicles, minivans and trucks, and related parts 52-wk Low $ 103.78(09/11/06) and accessories. The Financial Services Operations segment primarily provides finance to dealers and their customers for the Stop-Loss $ purchase or lease of Toyota vehicles. It also provides retail financing, retail leasing, wholesale financing and insurance, Market Data credit cards, and mortgage loans. The Other Operations segment Market Cap $ 201.84 B designs and manufactures prefabricated housing and information Total assets $ 275.94 B technology related businesses, including intelligent transport Trading vol 603,348 systems and an e-commerce marketplace, called (3mon avg) Toyota sells its vehicles in Japan, North America, Europe and Asia. The company was founded in 1933 and is based in Toyota Valuation City, Japan. EPS (ttm) $ 8.36 P/E (ttm) 15.10 Toyota manufactures vehicles in 27 countries and regions PEG 1.65 throughout the world and sells them in more than 170 countries Div Yield and locations. In 2006, Toyota produced more than 1.55 million vehicles and more than 1.4 million engines at its North American manufacturing facilities. Also in 2006, sales of hybrid Profitability & Effectiveness (ttm) vehicles were brisk, with shipments up by 120,000 units to ROA 5% ROE 14.68 % Profit Margin 6.87 % Oper Margin 9.35 % Gross Margin 19.71 % Stop loss recommendation : $ 100 263,000 vehicles. To date, Toyota has sold more than 600,000 hybrid vehicles. By 2008, Toyota will have the annual capacity to build nearly two million cars and trucks in North America. The chart above shows how Toyota has been steadily increasing Analyst: the amount of products built in North America. Also, annual Vikranth Terala purchasing of parts, materials, goods and services from North American suppliers totals more than $28 billion. 1
  2. 2. Economic & Industry Environment In automotive markets worldwide, demand promises to remain strong. While many regions are likely to see the continuing spread of automobiles, more mature regions offer encouraging prospects for vehicles incorporating new technology and concepts. In view of these trends, Toyota is confident that automotive markets will expand in the medium-to-long term and that the automobile industry will sustain growth by exploiting the substantial potential of these markets. However, in light of the world economic outlook and other possible sources of instability, the overall international situation requires careful monitoring. Toyota’s mission is to ensure that they sustain growth by responding flexibly to operating conditions while capitalizing on business opportunities. Toyota’s major competitors include Honda, Ford, and General Motors. The “Big 3” American manufacturers have seen steadily decreasing profits in the past. As consumers constantly face rising gas prices, U.S auto manufacturers such as Ford and GM have to struggle to develop fuel efficient vehicles. The development of these vehicles has proven too costly for the U.S. companies. From the chart provided below, you can see that compared with its competitors Toyota is the leader in Market Cap, Quarterly Revenue Growth, Operating Margins, and EPS. They also have a favorable P/E ratio comparable to the industry average. DIRECT COMPETITOR COMPARISON TM F GM HMC Industry Market Cap: 201.84B 17.13B 20.64B 134.65B 20.80B Employees: 299,394 283,000 280,000 N/A 280.00K Qtrly Rev Growth (yoy): 10.10% 5.50% -16.20% 9.00% 7.70% Revenue (ttm): 195.61B 162.35B 198.88B 90.56B 162.35B Gross Margin (ttm): 19.71% 2.30% 17.03% 29.06% 19.34% EBITDA (ttm): 31.31B 7.52B 19.29B 10.84B 10.84B Oper Margins (ttm): 9.35% -5.99% 4.20% 7.68% 4.05% Net Income (ttm): 13.43B -11.47B -2.52B 4.84B 8.20M EPS (ttm): 8.36 -6.088 -4.449 1.33 1.08 P/E (ttm): 15.10 N/A N/A 27.78 15.84 PEG (5 yr expected): 1.65 N/A 1.58 1.58 1.65 P/S (ttm): 1.04 0.11 0.10 1.49 0.61 F = Ford Motor Co. GM = General Motors Corporation HMC = Honda Motor Co. Ltd. Industry = Auto Manufacturers - Major 2
  3. 3. Risks • The worldwide automobile market is highly competitive. Competition is likely to further intensify in light of continuing globalization and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. • The worldwide automobile industry is highly volatile. Demand for automobile sales depends to a large extent on general, social, political and economic conditions in a given market and the introduction of new vehicles and technologies. As Toyota’s revenues are derived from sales in markets worldwide such as Japan, North America and Europe, economic conditions in these countries and regions are particularly important to Toyota. Demand may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations (including tariffs, import regulation and other taxes). • Toyota’s future success depends on its ability to offer innovative new, price competitive products that meet and satisfy customer demand on a timely basis. Meeting and satisfying customer demand with attractive new vehicles and reducing product development times are critical elements to the success of automobile manufacturers. The timely introduction of new vehicle models, at competitive prices, meeting rapidly changing customer preferences and demands is fundamental to Toyota’s success. • Toyota’s ability to market and distribute effectively, and Toyota’s maintenance of brand image, are integral parts of Toyota’s successful sales. Toyota’s success in the sale of automobiles depends on its ability to market and distribute effectively based on distribution networks and sales techniques catered to its customers as well as its ability to maintain and further cultivate its brand image across the markets in which it operates. • The worldwide financial services industry is highly competitive. The market for automobile financing has grown as more consumers are financing their purchases, primarily in North America and Europe. Increased competition in automobile financing may lead to decreased margins. • Other Risks -Currency and Interest Rate Fluctuations -Governmental Regulations and Legal Proceedings Strategy Toyota is undertaking a range of measures to ensure that future demand fluctuations do not significantly impact earnings. An example of those measures is their recent IMV (International Multipurpose Vehicle) project, in which they are constructing a global production and supply system that allows them to respond flexibly and promptly to various demand changes. The global scope of the system enables TM to offset demand variations across different regions and make optimal use of overall production and supply capabilities. Furthermore, TM has mitigated risks associated with demand fluctuation by introducing innovative production systems and production engineering that increase the flexibility with which they can raise or lower plant production capacity. 3
  4. 4. As long as Toyota is a manufacturer, technology development capabilities will be the wellspring of its growth. In particular, TM is the automobile industry’s frontrunner in the field of environmental technology development. For example, with their hybrid strategy—the centerpiece of their environmental technology initiatives—they are targeting annual sales of one million hybrid vehicles by the early 2010s. To that end, they are stepping up efforts to develop innovative technology that will reduce costs and raise performance and fuel efficiency. Compared with the first Prius model, the hybrid system in current, second-generation vehicles realizes better performance and substantially lowers cost; however, development is under way of a next generation that halves system size and cost. As for models, plans call for a doubling of the current lineup of seven passenger-car-type hybrid models early in the 2010s. Their second key growth strategy is the advancement of localization. To meet heavier demand worldwide, they will raise the ratio of local production—globally balancing the increase in production capacity. In the current fiscal year, the start-up of plants in Guangzhou in China and in Texas in the United States will add 300,000 vehicles to production capacity. On top of that, with new plants due to come onstream in Thailand, China, Russia, and Canada, they plan to raise production capacity by more than 700,000 units worldwide by 2008. In this way, they will take advantage of business chances worldwide by lifting local production capacity. Also, by aggressively increasing local purchasing ratios, they hope to contribute to the development of local economies through employment creation and the cultivation and advancement of industry. Toyota will also continue to steadily grow sales of hybrid vehicles and Lexus-brand vehicles. They will leverage the strong product appeal of their core global models—which account for more than 30% of consolidated vehicle sales—to step up marketing initiatives. In line with this strategy, they have already launched a completely remodeled Camry, which was the result of a successful development project tasked with achieving a simultaneous worldwide production start-up. Financial Results During FY2007, the Japanese economy experienced some weakness in personal consumption, but corporate revenues were in better shape and capital expenditure increased, resulting in a continuation of prolonged economic growth. Overseas, economic conditions remained steady overall, with stability in both capital expenditure and personal consumption in the United States, and acceleration in the pace of recovery in the European economy, while in Asia, the Chinese economy showed continued strong growth. Under these conditions, consolidated vehicle sales in Japan and overseas increased by 550 thousand units, or 6.9%, to 8,524 thousand units in FY2007 compared with FY2006 (April 1, 2005 through March 31, 2006), marking a record high. Vehicle sales in Japan in FY2007 decreased by 91 thousand units, or 3.9%, to 2,273 thousand units compared with FY2006 under the declined market in Japan compared to FY2006. With the efforts of dealers nationwide, however, Toyota and Lexus’ market share excluding mini-vehicles was 45.8%, and its market share including mini-vehicles was 41.5%, each representing a record high. Meanwhile, overseas vehicle sales in FY2007 increased significantly by 641 thousand units, or 11.4%, to 6,251 4
  5. 5. thousand units, compared with FY2006, because of sales expansion in North America, Europe and other regions. As for the results of operations, net revenues increased by 2,911.1 billion yen, or 13.8%, to 23,948.0 billion yen in FY2007 compared with FY2006, and operating income increased by 360.3 billion yen, or 19.2%, to 2,238.6 billion yen in FY2007 compared with FY2006. Among the factors contributing to the increase in operating income totaling 720.0 billion yen, were the effects of marketing efforts of 330.0 billion yen, changes in exchange rates of 290.0 billion yen, and cost reduction efforts of 100.0billion yen. On the other hand, factors resulting in the decrease in operating income primarily included an increase in expenses of 359.7 billion yen. Income before income taxes, minority interest and equity in earnings of affiliated companies increased by 295.2 billion yen, or 14.1%, to 2,382.5 billion yen in FY2007 compared with FY2006. Net income increased by 271.9 billion yen, or 19.8%, to 1,644.0 billion yen in FY2007 compared with FY2006. Valuation First, a beta must be calculated in order to value the firm. By regressing the three-year weekly returns for TM and the S&P 500, I found a beta of 1.27. Since this beta was much higher than analysts’ estimates (around 0.53) I calculated the levered beta. In order to do this, the firm’s book values of debt and equity, tax rate, and industry unlevered beta must be entered into Damodoran’s formula. This gave me a beta of 1.30, which will be used for valuation purposes. This beta is applied to the CAPM to determine the company’s discount rate. Rf= 4.70% Rp= 3% Beta= 1.53 Therefore, Re= 4.70% + 1.53(3%) = 9.3% Owners’ Earnings Model Valuing TM using the Owners’ Earnings Model indicates that the stock is undervalued. First, a conservative growth rate of 8% is assumed (lowest of analysts’ estimates) along with a conservative second stage growth rate of 3% over a five-year span. The results are shown below: Warren Buffett Way Owners' Earnings Discount Model assuming discount rate (k) of 9.30% Owner Earnings in 2007: Net Income $ 13,927,000,000.00 Depreciation $ 11,712,000,000.00 Amortization $ - Capital Expenditures $ 24,022,000,000.00 $ 49,661,000,000.00 Owner Earnings 2007 $ 49,661,000,000.0 Prior Year Owner Earnings First Stage Growth Rate (add) 8.0% 5
  6. 6. Owner Earnings $ 53,663,880,000.0 Discounted Value per annum $ 53,663,880,000.0 Sum of present value of owner earnings $400,751,206,678.1 Residual Value Owner Earnings in year 10 $ 64,097,451,414.4 Second Stage Growth Rate (g) (add) 2.00% Owner Earnings in year 11 $ 65,379,400,442.7 Capitalization rate (k-g) 7.30% Value at end of year 10 $ 895,608,225,242.03 Present Value of Residual $368,058,162,810.65 Intrinsic Value of Company $768,809,369,488.75 Shares outstanding assuming dilution 1800000000 Intrinsic Value per share $427.12 From this valuation, Toyota’s stock is UNDERVALUED by about $300. This is much higher than what the stock is trading at so I decided to do some sensitivity analysis on the growth rate and beta. 1st stage 2nd Stage Value($) 4 2 411.30 From this sensitivity analysis on growth, you 6 2 419.21 can see that with an extremely low growth rate 4 4.79 657.86 TM is still undervalued. 6 4.79 670.51 Stock Performance 6
  7. 7. The above chart compares Toyota’s stock performance with the S&P500 industry. You can see that the company has really outperformed the S&P over the past three years. This chart compares the different companies in the Auto Manufacturers industry in terms of stock performance. Again, Toyota is the strongest, followed by Honda. Analysts Expectations Current 1 Mo. Ago 3 Mo. Ago Buy 7 7 3 Overweight 5 4 5 Hold 2 3 3 Underweight 1 1 0 Sell 0 0 0 Mean OVERWEIGHT OVERWEIGHT OVERWEIGHT The above table shows the analyst ratings for the stock. The overall recommendation is to buy. Recent News 7
  8. 8. July 6, 2007 Japanese auto maker Toyota sold 212,000 vehicles in the period, up 77% from a year earlier, powered by demand for its Camry sedans. Toyota rolled out its first China-made Camry in May 2006 from a new plant in the southern Chinese city of Guangzhou to compete with models such as Honda Motor Co.'s Accord. Sales of the Camry totaled nearly 78,000 units, on track to hit the full-year target of 150,000, or more than one-third of Toyota's total China sales goal of 430,000 vehicles in 2007. Toyota sold 12,000 of its Lexus luxury cars in the half, nearly matching the 13,000 sold in all of 2006 and on track to meet its full-year 2007 target of 22,000. July 5, 2007 Toyota Motor Corp., the world's biggest automaker by market value, plans to increase its capacity in India 10 fold to 600,000 units by 2015. Toyota will join Honda Motor Co. and General Motors Corp. in increasing capacity in India, Asia's fourth-biggest automotive market. Suzuki Motor Corp.'s local unit, Maruti Udyog Ltd., and Hyundai Motor Co. are also building factories as economic growth boosts demand for automobiles. Toyota had 3.7 percent of India's passenger vehicle market in the fiscal year ended March 31. Economic growth and rising disposable incomes are boosting vehicle sales in India, where seven in 1,000 people own an automobile compared with 500 in Western Europe. July 4, 2007 Toyota Motor Corp, which has had a record first half of the year, continued improving its gas- electric hybrid sales. In June, the company's Toyota and Lexus brands posted combined sales of 27,382 hybrid vehicles, up 46% over last June. July 3, 2007 General Motors Corp. said Tuesday its U.S. light vehicle sales plunged 21.3 percent in June, while Toyota Motor Corp. reported its vehicle sales jumped 10.2 percent. June 28, 2007 Toyota Motor Corp., the world's top auto maker, may carry on spending $2 billion or more a year to buy back its own shares for another 6-7 years, contrary to widely held views it was winding down the practice. That's good news for many investors, who assumed Japan's most-profitable company would focus instead on rewarding shareholders by paying higher dividends. Recommendation Currently about 1.08% of our portfolio has been allotted for the TM stock. We have 120 shares of TM. My recommendation is to buy more shares of Toyota motors because the stock is greatly 8
  9. 9. undervalued. The future of automobile industry is in hybrid motors and Toyota is the pioneer in manufacturing them. Stop Loss Recommendation My stop loss recommendation is $100. This is consistent with the recommendation of the portfolio committee to set the stop loss price near the 300-day moving average. This stop loss price would put our risk to capital at 0.40% as shown below. ($126.23 - $100)*220/1,396,492.08= 0.40 Appendices a. Calculating Beta Inputs 9
  10. 10. Tax Rate 0.19 BV Debt 132,402.00 BV Equity 100,263.0 0 Unlevered Beta 0.64 Output Levered Beta 1.5297216 Income statement All numbers in thousands 10
  11. 11. PERIOD ENDING 31-Mar-07 31-Mar-06 31-Mar-05 11
  12. 12. Total Revenue 202,864,000 179,083,000 172,749,000 Cost of Revenue 162,883,000 144,249,000 138,469,000 Gross Profit 39,981,000 34,834,000 34,280,000 Operating Expenses Research Development - - - Selling General and Administrative 21,017,000 18,844,000 18,709,000 Non Recurring - - - Others - - - Total Operating Expenses - - - Operating Income or Loss 18,964,000 15,990,000 15,571,000 Income from Continuing Operations Total Other Income/Expenses Net 1,636,000 1,963,000 945,000 Earnings Before Interest And Taxes 20,600,000 17,953,000 16,516,000 Interest Expense 418,000 184,000 177,000 Income Before Tax 20,182,000 17,769,000 16,339,000 Income Tax Expense 7,609,000 6,769,000 6,126,000 Minority Interest (421,000) (718,000) (605,000) Net Income From Continuing Ops 13,927,000 11,681,000 10,907,000 Non-recurring Events Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - - Net Income 13,927,000 11,681,000 10,907,000 Preferred Stock And Other Adjustments - - - 12
  13. 13. Net Income Applicable To Common Shares $13,927,000 $11,681,000 $10,907,000 Balance Sheet All numbers in thousands PERIOD ENDING 31-Mar-07 31-Mar-06 31-Mar-05 13
  14. 14. Assets Current Assets Cash And Cash Equivalents 16,324,000 13,788,000 14,408,000 Short Term Investments 3,689,000 5,405,000 5,058,000 Net Receivables 60,126,000 54,608,000 51,596,000 Inventory 15,281,000 13,799,000 12,168,000 Other Current Assets 4,403,000 3,787,000 4,675,000 Total Current Assets 99,823,000 91,387,000 87,905,000 Long Term Investments 98,937,000 86,288,000 84,731,000 Property Plant and Equipment 68,281,000 60,157,000 53,968,000 Goodwill - - - Intangible Assets - - - Accumulated Amortization - - - Other Assets 8,900,000 6,755,000 - Deferred Long Term Asset Charges - - - Total Assets 275,941,000 244,587,000 226,604,000 Liabilities Current Liabilities Accounts Payable 43,276,000 39,402,000 38,477,000 Short/Current Long Term Debt 49,686,000 40,495,000 32,896,000 Other Current Liabilities 6,718,000 5,476,000 5,238,000 Total Current Liabilities 99,680,000 85,373,000 76,611,000 Long Term Debt 53,059,000 48,016,000 46,698,000 Other Liabilities 6,500,000 6,975,000 6,810,000 Deferred Long Term Liability Charges 11,117,000 9,305,000 7,558,000 Minority Interest 5,322,000 5,019,000 4,702,000 Negative Goodwill - - - Total Liabilities 175,678,000 154,688,000 142,379,000 Stockholders' Equity Misc Stocks Options Warrants - - - 14
  15. 15. Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 3,363,000 3,380,000 3,697,000 Retained Earnings 99,659,000 89,042,000 86,900,000 Treasury Stock (12,915,000) (10,462,000) (10,237,000) Capital Surplus 4,215,000 4,216,000 4,616,000 Other Stockholder Equity 5,941,000 3,723,000 (751,000) Total Stockholder Equity 100,263,000 89,899,000 84,225,000 Net Tangible Assets $100,263,000 $89,899,000 $84,225,000 Cash Flow All numbers in thousands PERIOD ENDING 31-Mar-07 31-Mar-06 31-Mar-05 Net Income 13,927,000 11,681,000 10,907,000 15
  16. 16. Operating Activities, Cash Flows Provided By or Used In Depreciation 11,712,000 10,311,000 9,291,000 Adjustments To Net Income 571,000 842,000 670,000 Changes In Accounts Receivables (1,803,000) (2,533,000) (1,661,000) Changes In Liabilities 3,752,000 3,795,000 3,589,000 Changes In Inventories (1,133,000) (2,118,000) (1,784,000) Changes In Other Operating Activities 405,000 (564,000) 1,066,000 Total Cash Flow From Operating Activities 27,431,000 21,414,000 22,078,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (24,022,000) (23,591,000) (17,909,000) Investments (11,871,000) (9,387,000) (14,189,000) Other Cashflows from Investing Activities 3,581,000 4,243,000 3,593,000 Total Cash Flows From Investing Activities (32,312,000) (28,735,000) (28,505,000) Financing Activities, Cash Flows Provided By or Used In Dividends Paid (2,873,000) (2,082,000) (1,539,000) Sale Purchase of Stock (2,505,000) (1,104,000) (2,459,000) Net Borrowings 12,847,000 10,651,000 7,903,000 Other Cash Flows from Financing Activities - - - Total Cash Flows From Financing Activities 7,469,000 7,465,000 3,905,000 Effect Of Exchange Rate Changes 216,000 585,000 231,000 Change In Cash and Cash Equivalents $2,804,000 $729,000 ($2,291,000) 16