In this article, let's take a look at Toyota Motor Corporation (TM, Financial), a $182.43 billion market cap company that is one of the world's largest automobile producers.
Quality and more
Four years ago, the company had the idea to establish a quality committee. This consists of having a chief quality officer from every region. Apart from improving quality, other aspects like internal communication or control that can develop designers should lead to design more attractive models. Toyota's strategy is to give more power to regional design centers that know the specific markets.
Strong competition
The auto industry is really characterized by a strong competition, which means that any automaker can possibly have a competitive advantage for ever. Companies from China and India may soon enter developed markets such as the U.S. New competitors, such as Hyundai and Kia, are a threat to older brands.
International focus
In 2013, about 77% of Toyota's vehicle sales were outside Japan, with 9.8 million units sold, and 58% of production was based outside the country. In FY 14 (March), 33% of consolidated revenue and 26% of unit sales were generated in Japan. Toyota's goal is to consistently achieve market share of 40% (at least) in Japan. Market share in Japan is 47%, while in the U.S. it is around 14%.
We continue believe that plants outside Japan will help to deal with currency risk in a weak dollar environment. Toyota's manufacturing expertise will be implemented in countries, such as Brazil, China, India and Indonesia.
Revenues, margins and profitability
Looking at profitability, revenue grew by 0.07% but earnings per share increased in the most recent quarter compared to the same quarter a year ago by 16.8% ($3.66 vs $3.58). During the past fiscal year, the company increased its bottom line. It earned $11.17 versus $6.46 in the previous year. This year, Wall Street expects an improvement in earnings ($11.83 versus $11.17).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| TM | Toyota | 13.27 |
| F | Ford Motor Co. | 30.98 |
| GM | General Motors Co. | 7.27 |
| HMC | Honda Motor Co. | 10.5 |
| Â | Industry Median | 10.16 |
The company has a current ROE of 13.27% which is higher than the one exhibit by General Motors (GM, Financial), Honda Motor Co. (HMC, Financial) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher levels of ROE, Ford (F, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 10.6x, trading at a discount compared to an average of 15.8x for the industry. To use another metric, its price-to-book ratio of 1.3x indicates a discount versus the industry average of 1.43x while the price-to-sales ratio of 0.80x is above the industry average of 0.64x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $13,873, which represents a 6.8% compound annual growth rate (CAGR).
Final comment
Toyota is the world's largest automaker in calendar 2013. The Japan-based company is the leading automaker in the world in terms of sales and production after the loss in reputation due to a series of safety recalls. The management focuses on global operations with regional strategies. Further, key initiatives such as improving efficiency and expanding operations are efforts that soon will be rewarded.
Moreover, the stock's relative valuation and the return on equity that exceeds the industryaverage make me feel bullish on this stock.
Hedge fund gurus like Jeff Auxier (Trades, Portfolio), John Rogers (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Donald Smith (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
