Is There Anything To Admire In Toyota Motor Corp (ADR) (NYSE:TM)?

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Toyota Motor Corp (ADR) (NYSE:TM) had a difficult F3Q2016 as both EPS and revenue missed expectations. But the management insisted that earnings and revenue for fiscal 2016 will be higher than the previous fiscal year. Toyota has been stung by a string of vehicle recalls and related fines. Weak vehicle sales also doused performance in the quarter as did fiscal 2015.

Going ahead, Toyota is hoping that expansion into emerging markets, product innovation and operation efficiency will boost its performance in the coming years. But can you buy into Toyota’s promise? This Toyota analysis article examines the company’s risks and opportunities to bring out the facts you need to know if you are considering investment in the stock. But first, here is a quick highlight of last quarter’s earnings.

F3Q2016 highlight

Toyota Motor Corp (ADR) (NYSE:TM)’s F3Q2016 EPS of $3.27 fell from $3.33 a year earlier and also missed the consensus estimate of $3.44. Consolidated revenue of $60.66 billion in the quarter rose 2.4% YoY but still missed the consensus estimate of $63.54 billion.

Segmental performance

Toyota reports earnings in three segments namely Automotive, Financial Services and All Other businesses. In F3Q2016, Automotive revenue increased 1.6% to $55.54 billion. Financial Services revenue rose 10.6% to $4 billion and All Other businesses revenue fell 6% to $2.34 billion.

The chart below depicts Toyota’s segmental revenues for F3Q2016.

Capture

F2016 guidance

Toyota is looking for fiscal 2016 EPS of $12.06 on revenue of $229.17 billion. As such, EPS is expected to improve 4.4% from fiscal 2015 level and revenue is expected to improve 1% from fiscal 2015 level.

What’s exciting about Toyota?

  1. Production efficiency

Toyota Motor Corp (ADR) (NYSE:TM) came up with an initiative it calls Toyota New Global Architecture (TNGA). The main focus of the initiative is to improve efficiency in product development and production processes. Therefore, under TNGA, Toyota plans to move about 50% of its total vehicle production to new manufacturing platforms by 2020. The move is expected to result in 20% reduction in product development costs.

Still under TNGA program, Toyota is working to cut the cost of launching new production plants by 50% from the 2008 level. Additionally, the company is working to reduce the initial investment for a new plant by 40% from the 2008 level.

TNGA is also focused on developing more fuel efficient vehicles. For example, Toyota is working towards improving fuel efficiency of its gas-powered vehicles by 20% and that of the hybrid vehicles by 15%.

      2.Corporate restructuring

Toyota is in the process of simplifying its corporate structure so that it can operate more efficiently. Initially, though, there will be some costs associated with new headquarters constructions and moving of employees around to realign them with the new corporate structure. However, the company will be able to facilitate speedy decision-making and increase efficiency after it completes the restructuring process.

      3.Product innovation

Toyota Motor Corp (ADR) (NYSE:TM) is banking on technology to enable it differentiate its products and fuel sales in an industry that has come increasingly competitive in the recent years as players seek to undo one another from all angles. To boost its competitive advantage, Toyota formed a technology focused unit called Toyota Connected, which is working with partners including Microsoft Corporation (NASDAQ:MSFT) to research and develop solutions for Internet connected vehicles. The focus is on enhancing in-car infotainment experience.

      4.Fuel cell vehicle (FCV)

Toyota is planning to increase the production of its fuel cell vehicle called Toyota Mirai in anticipation of strong demand and also as part of its green energy drive. Mirai was introduced in Japan in November 2014 and went on sale in December the same year. The vehicle was introduced in the U.S. and Europe in 2015.

Toyota notes that Mirai’s popularity is increasing and it believes demand will be strong in the coming years. As such, the company is looking to produce 2,000 units of Mirai in 2016 and raise the production to 3,000 units in 2017. By 2020, Toyota expects to be selling 30,000 FCV every year. To make that dream a reality, Toyota is working with partners to increase the number of hydrogen fuel stations where drivers of FCV can reenergize their vehicles.

      5.Increased focus on emerging markets

Toyota Motor Corp (ADR) (NYSE:TM) is doubling down its efforts in emerging markets to help fuel sales growth at time when competition is growing intense in emerging markets amid tightening regulations. To drive growth in emerging markets, Toyota is taking a multipronged approach in which it is expanding production capacity, launching new vehicle models with wide appeal and shifting to more efficient production platforms.

As for launch of new models, Toyota plans to launch 15 new or revamped vehicle models in China by fiscal 2017. With that move, Toyota also hopes to double its vehicle sales in the country. The company is targeting to sell two million vehicles in China every year.

As part of its emerging markets foray, Toyota has in the recent years announced expansion of production capacity and launch of brand new production facilities in a number of emerging markets.

Ultimately, Toyota’s target is to get emerging markets to contribute at least 50% of its global sales.

What’s worrying about Toyota?

  1. Massive vehicle recall

Toyota Motor Corp (ADR) (NYSE:TM)’s frequent recalls are bad for its image and bottom-line. Early this year, the company recalled 2.87 million vehicles to fix a problem with the seatbelts. That followed a recall of 6.5 million vehicles in October 2015 over overheating problem. A year earlier, the company had recalled 6.36 million vehicles globally. In 2012 and 2013, the company recalled 5.3 million vehicles in each year.

The frequent and massive recalls dent the company’s reputation. Additionally, they introduce extra costs that eventually eat into profits.

Besides the direct cost of fixing problems in recalled vehicles, Toyota has also been made to pay millions, sometimes billions, of dollars to settle safety defects-related issues with regulators and affected customers.

      2.Weak vehicle sales

Toyota expects to sell 8.75 million vehicles globally in fiscal 2016, but there is a problem. First, vehicle sales in the first nine months of fiscal 2016 fell 3.7% YoY to 6.49 million units. Therefore, looking at the target of 8.75 million units, there is much ground for Toyota to cover to hit its target.

Additionally, the 8.75 million vehicles targeted to be sold in fiscal 2016 is short of the nearly 8.97 million vehicles Toyota sold in fiscal 2015.

      3.Parts price reduction

China’s antitrust probe into the country’s auto industry affected many players including Toyota Motor Corp (ADR) (NYSE:TM). In the case of Toyota, the company had to cut price of its various vehicle parts to comply with the new policies. On the average, Toyota reduced parts prices by 26%. But given that parts sales generate a significant portion of Toyota’s sales, reduction in parts price will adversely affect its topline.

Takeaway

There are enough opportunities for Toyota Motor Corp (ADR) (NYSE:TM) to exploit to drive growth. However, reaching the targets will depend on the speed and quality of management execution.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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  • Bob_Wallace

    Toyota has stated that fueling its Mirai costs 17 cents per mile. A 30 MPG car burning $3/gallon gas costs 10 cents per mile. An EV charging with $0.12/kWh electricity costs 4 cents per mile.

    There’s nothing about the Mirai that makes it special in the way of performance.

    Why would anyone buy a Mirai? It costs almost three times what a Toyota Camry costs to purchase and a lot more to operate. It’s not even green. Almost all US hydrogen comes from reformed natural gas.

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