Toyota Motor Corp (NYSE:TM) as one of the world's largest automakers is known for its best-in-class car models with a reputation of quality and reliability. While the company faced disruptions during the pandemic, the story over the past year has been a strong recovery driven by record demand while continuing to move forward with a plan at expanding its electrified vehicle offerings. Indeed, the company just reported its latest quarterly result which beat expectations despite some ongoing production challenges related to the global semiconductor shortages. With the stock in a correction amid the current market volatility, we are bullish on TM which is well-positioned to recover, supported by overall solid fundamentals and a positive long-term outlook.
How Were Toyota Stock Earnings?
Toyota released its fiscal Q3 earnings on February 9th with a net income of JPY 791.7 billion representing approximately $6.9 billion. While the result was about 6% lower on a year-over-year basis, the 2-year comparison as a pre-pandemic benchmark with net income up 42% over the period highlights the underlying strength of the business. Revenue this quarter at JPY 7.8 trillion or $67.7 billion was down 4.5% y/y, but up 19% over the first nine months. This considers that the latest quarter faced a more difficult comparison period in 2020 during the early stages of the "reopening" dynamic which was particularly strong.
The momentum has been across regions and segments including China and financial services contributing to the profitability trend. As we mentioned, supply chain shortages have been an issue limiting production which echoes an industry-wide trend among all auto manufacturers. In this regard, the latest results here are even more impressive considering sales revenues are up 2.3% compared to the quarter in 2019 even as the 2.003 million vehicle sales sold this quarter was down 9% over the period and 14% lower year over year.
The key point here is that the consumer demand at retail is there but Toyota simply can't manufacture the models fast enough. Strong pricing and limited discounting against marketing efforts have helped to support profitability. From the table below, an important development has been the climbing importance of electrified vehicles (EVs) within the Toyota and Lexus brand which now represent 27.8% of all retail sales in the quarter, up from 23.2% in 2020 and 19.4% in 2019.
To be clear, a large component of the EV sales are hybrids (HEVs) at 609k units in the quarter, up from 588k last year. Toyota has shown a preference towards hybrids given their fuel efficiency advantage and ease of adoption by not requiring charging. That said, the strategy long-term is to add battery-powered electric vehicles (BEVs) which are still a small portion of its lineup with only 5k units sold in the quarter, up from 2k last year and 0 in 2019. The company's 2023 model year "bZ4X" will be a mass-market BEV set to appear at the dealership later this year. The company expects the proportion of EVs as a percentage of total sales to continue climbing based on consumer demand.
Toyota 2022 Guidance
Management made a couple of updates to its full-year 2022 guidance, revising lower the total sales figure to JPY 29.5 trillion from JPY 30.0 trillion citing the ongoing "production instability". Nevertheless, the result if achieved would still be up 8% over 2021.
The company also believes it can maintain margins elevated by pricing efforts considering the target for the operating margin at 9.5% compared to 8.1% last year. The expectation is for net income to be flat on a year-over-year basis but likely to improve getting into fiscal 2023.
Toyota expects full-year consolidated vehicles sales at 8.25 million units, down from a prior 8.55 million estimate, but still up from 7.646 million last year. Importantly, the sales outlook for electrified vehicles this year is unchanged at 2.65 million units representing 28.2% of the Toyota and Lexus brands at retail compared to 23.7% last year. BEV sales at 15k units compare to 6k last year, a 150% increase.
Is Toyota Stock A Good Long-Term Investment?
One of the criticisms towards Toyota is that the company has been slow to shift towards EVs which is in contrast to other legacy manufacturers like Ford Motor Company (F) or even Germany's Volkswagen AG (OTCPK:VWAGY) that have taken an "all in" approach". Over the past decade, the momentum that EV leader Tesla, Inc. (TSLA) captured likely came as a surprise to many including Toyota management which appears to have misjudged the consumer demand and accelerated penetration globally.
Nevertheless, it's latest messaging has been a more concerted strategy to produce 3.5 million electric vehicles per year by 2030 while making the Lexus brand 100% EV. That said, beyond the environmental concerns, we believe there is value in continuing to serve the ICE (internal combustion engine) market with vehicle options that are affordable and reliable for different markets. Toyota's hybrids are recognized as a fuel-efficient option by self-charging a smaller internal battery based on regenerative braking along with a small engine can represent a middle ground for a segment of consumers that are hesitant to take the plunge going to full EV immediately.
Our take is that the balanced approach in Toyota's transition towards EVs while supporting ICE technology continues to represent a growth opportunity. The effort has been reflected in overall stronger profitability compared to a peer group that we include Honda Motor Co., Ltd. (HMC), General Motors Company (GM), Nissan Motor Co., Ltd. (OTCPK:NSANY), Volkswagen AG, and Ford considering Toyota's 10.4% operating margin over the past year compared to the group average.
While all automakers have faced supply chain shortages, Toyota production figures have been more resilient compared to other manufacturers which have faced deeper declines in output, particularly last year. The higher underlying profitability by Toyota is reflected in an earnings premium considering its EV to EBITDA ratio at 7.8x compared to 6x for Honda and GM or 5x for Ford. We believe the spread is justified considering Toyota's leadership position as the world's best-selling automaker.
With some limited available consensus estimates, the forecast is for Toyota revenues to reach $297 billion for fiscal 2023 "next year" which represents a 16% increase compared to the current management guidance for fiscal 2022 around $256 billion at the current FX rate. The understanding is that as supply chain conditions improve into 2023, margins and earnings can accelerate higher. The 2022 EPS forecast at $18.67 and $23.45 for 2023 implies a forward P/E of 9.8x, and a 1-year forward P/E of 7.8x. We believe there is some upside to this outlook, particularly on the top-line with a sense that the guidance from management this year is on the conservative side.
Is TM Stock A Buy, Sell, or Hold?
There are several reasons to be bullish on Toyota Motor. The attraction here is the brand name that benefits from a loyal customer following which provides a natural backdrop of strong demand for every future EV offering with the Toyota or Lexus badge. Even if the company hasn't been a leader in battery-powered EVs, its strategy to ramp up in that direction is credible given its global infrastructure and manufacturing expertise. By this measure, the company maintains a strong growth outlook and is well-positioned to consolidate its global market share.
We rate shares of TM as a buy with a year ahead price target of $235.00 representing a 1-year forward P/E of 10x on the current consensus fiscal 2023 EPS. From the chart below, shares of TM have been hugging a trendline since the depths of the pandemic crash back in 2020. Our call here is for this trend to continue and the latest pullback from a high of $212 in early January now represents a new buying opportunity.
Amid all the headlines of macro concerns, elevated inflation pressuring consumer discretionary spending, and climbing interest rates; we're taking a more optimistic view. That said, there are risks to consider. A deterioration of the global growth outlook with an eye on developments in Eastern Europe with the Russia-Ukraine conflict has the potential to undermine the stock's bullish case. Weaker than expected results, below management guidance, would also open the door for a leg lower in the stock with a reassessment of the long-term earnings outlook. Monitoring points over the next few quarters including production and sales levels, the operating margin, along with any updates on the BEV strategy.
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