$TM - Toyota Motors: Recent News and Valuation

$TM – Toyota Company Overview: Toyota Motor company and Toyota Motor Sales merged together in 1982 to create what we now know today as “Toyota Motors”. Toyota’s primary business focuses on the automotive industry, selling over 7M vehicles in 2021 alone. Toyota has separated their revenues into 3 segments, being Automotive (manufacturing and selling of their vehicles), Financial (providing financing to dealers and customers), and other revenues (Toyota’s information technology business, automobile information services etc.). ESG Initiatives: Today, more than ever, investors are considering the ESG (Environmental, Social, and Governance) initiatives of the businesses they are vested in. Don’t just take it from me, rather take it from John Tennaro (Head of ESG Investing at CIBC Private Wealth), who said “There is a growing demand for solutions that have the potential to lead to positive change, as we look to rebuild our communities/economies on stronger foundations […] looking ahead there will be a stronger focus on the social element of ESG.” This is backed by The Economist Intelligence Unit (EIU) who found that 76% of younger generations, and 37% of older generations consider ESG factors in their investment strategy (in the UK). This shift in investment mentality from mainly the younger generation is likely to persist over the next couple decades, and when this generation starts to accumulate wealth, it is likely that we will be able to see the effects of ESG conscious investing in the markets. So, why does all of this matter? Well, Toyota has released their “Environment Challenge 2050”, which outlines their goals and aspirations for the future of their business. These are by far the most ambitious targets that I have seen in a large business and is sure to cater toward the ESG conscious investor. Toyota’s Environment Challenge 2050 includes: Reduce the average CO2 emissions from new vehicles by 30% (90%) by 2025 (2050). New Vehicle CO2 emissions compared to Toyota’s 2010 levels. Reduce CO2 emissions throughout their vehicle’s life cycle by 18% (25%+) by 2025 (2030). Life Cycle emissions compared to Toyota’s 2013 levels. Reduce CO2 emissions from plants by 30% and convert 25% of their energy consumption to renewable sources. Emissions compared to Toyota’s 2013 levels. Reduce water use levels by 3% per vehicle. Compared to 2013 levels. Introduce battery collection/recycling systems and end-of-life vehicle recycling programs by 2030. Toyota also plans to develop technologies that use previously recycled materials in vehicle production. Contribute to biodiversity conservation programs/activities, expand their in-house environmental initiatives, and offer nature education programs by 2030. There are more details to their plans that I was not able to fully cover in this section, if you are interested in reading Toyota’s full plan click here (Page 16-19). Obviously, ESG initiatives are not going to have a large impact on the stock prices (especially in the short term), however I thought that it was important to mention, and for investors to know. With that being said, we are about to get into the information that can help us determine potential price movements in Toyota’s stock. Factors that contribute to Toyota’s stock: Recent SEC Filings: In order to get a good idea of the current state of Toyota, I have decided to go over their past 10 SEC filings. I will be picking out only the most important information from these filings and laying them out in an organized and digestible way. Share Repurchases: Toyota has authorized the repurchase of 2,286,300 shares in September 2021($201.55M USD) Toyota authorized the repurchase of 13,358,600 shares in August 2021 ($1.15B USD) Production Plans: There has been a recent shortage in automotive parts in Southeast Asia due to both a decline in operations at Toyota’s suppliers, and a decrease in semiconductor supply (both due to the COVID-19 pandemic). Toyota has reviewed their production plans and has stated the following. Toyota will not be lowering their revenue estimates for 2021 Toyota’s production estimates for September and October have decreased by 70,000 units, and 300,000 units respectively. Toyota is also unsure of the potential effects of this in November and has not yet given an estimate Toyota is suspending the operations of 10 of their 28 domestic production lines. This affects 9 of their 14 production plants. Toyota has previously suspended 27 of their lines in all of their 15 plants in August for the same reason. These numbers have been decreasing since then, which is a good sign. This had a large impact on the stock price of Toyota (-9%), however they quickly bounced back from this correction. Financial Results: Toyota has had quite the bounce back in 2021, as they: Increased vehicle sales by 85% YoY. Increased domestic vehicle sales by 30%. Increased overseas vehicle sales by 113%. Increased sales by 72% YoY. Increased operating income by over 7000% YoY Increased (pre-tax) income by 963% YoY Decreased their expenses by $225M (USD) Joby Aviation Merger Completion: Joby Aviation consummated their merger on August 10th 2021, as part of this deal, Toyota’s shares were cancelled and converted into 3.4572 shares of Joby aviation (for Toyota’s role in funding the merger). This resulted in Toyota’s post merger share balances of 78.75M shares, broken down as follows: 87M shares are held by Toyota Motor Company (TMC) 81M shares are held by Toyota’s A.I. Venture Fund 5K shares are held by Toyota A.I. Venture (parallel) Fund. This number of shares seemed too large until I found out that Toyota invested $390M in Joby’s Series C funding round at a valuation of $2B (implying an ownership stake of 19%). My Valuation of Toyota Motors ($TM): Comparable Analysis: As part of my valuation process, I compared Toyota’s following financial ratios to their publicly listed competitors ($HMC – Honda, $F – Ford, $GM – General Motors, and $STLA – Stellantis). D/E Ratio: I chose to compare Toyota’s D/E ratio to their competitors because the auto industry is very capital intensive. The capital-intensive nature of the auto industry makes the D/E ratio important because it best measures auto companies financial health and their ability to meet their debt obligations. With that being said, Toyota’s fair value based off of their D/E ratio is $257/share, which implies a share price increase of 44.5%. This number is on the lower side as I decided to take out Ford’s D/E ratio, as theirs was a heavy outlier (5-6 compared to the average of 2.26). ROE: I chose to compare Toyota’s ROE ratio to their competitors because ROE shows how the company is operating. Not only is it a common ratio in the auto industry, but it also helps investors to measure how profitable a company is to them (the shareholders. By comparing this ratio, Toyota’s fair value is $217/share, which implies an upside of 22%. P/B Ratio: I used the P/B ratio to compare Toyota to their competitors, because the P/E ratios of their competitors varied largely, and I wanted to use a stable metric to compare these companies. By doing this, I arrived at the P/B ratio, which estimates Toyota’s fair value to be $112/share, which implies a downside risk of 37%. I then took the average result of the 3 comparable ratios, which implies a total comparable valuation of $196/share, or a 9.8% upside potential. DCF Model: I projected Toyota’s financial performance over the next 10 years (to 2030) which included their FCF’s and projected their perpetual FCF’s based off of the risk-free rate of 1.474% (US 10-year yield). I then used the WACC (that I calculated in my model) to discount these FCF’s to today’s monetary value. By doing this, I arrived at a fair value of $TM – Toyota Motors of $226/share, which implies an increase in value of 27%. My Investment Plan: I believe that Toyota has the best upside potential under $180/share, and if I were to enter into a position, I would consider selling out at $211/share (avg of comparable valuation and DCF model). This plan would yield an upside of 18.41% which I think is realistic and attainable for Toyota in the coming months/years.

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$TM - Toyota Motors: Recent News and Valuation

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$TM – Toyota Company Overview:

Toyota Motor company and Toyota Motor Sales merged together in 1982 to create what we now know today as “Toyota Motors”. Toyota’s primary business focuses on the automotive industry, selling over 7M vehicles in 2021 alone. Toyota has separated their revenues into 3 segments, being Automotive (manufacturing and selling of their vehicles), Financial (providing financing to dealers and customers), and other revenues (Toyota’s information technology business, automobile information services etc.).

ESG Initiatives:

Today, more than ever, investors are considering the ESG (Environmental, Social, and Governance) initiatives of the businesses they are vested in. Don’t just take it from me, rather take it from John Tennaro (Head of ESG Investing at CIBC Private Wealth), who said “There is a growing demand for solutions that have the potential to lead to positive change, as we look to rebuild our communities/economies on stronger foundations […] looking ahead there will be a stronger focus on the social element of ESG.”

This is backed by The Economist Intelligence Unit (EIU) who found that 76% of younger generations, and 37% of older generations consider ESG factors in their investment strategy (in the UK). This shift in investment mentality from mainly the younger generation is likely to persist over the next couple decades, and when this generation starts to accumulate wealth, it is likely that we will be able to see the effects of ESG conscious investing in the markets.

So, why does all of this matter? Well, Toyota has released their “Environment Challenge 2050”, which outlines their goals and aspirations for the future of their business. These are by far the most ambitious targets that I have seen in a large business and is sure to cater toward the ESG conscious investor.

Toyota’s Environment Challenge 2050 includes:

  • Reduce the average CO2 emissions from new vehicles by 30% (90%) by 2025 (2050).
    • New Vehicle CO2 emissions compared to Toyota’s 2010 levels.
  • Reduce CO2 emissions throughout their vehicle’s life cycle by 18% (25%+) by 2025 (2030).
    • Life Cycle emissions compared to Toyota’s 2013 levels.
  • Reduce CO2 emissions from plants by 30% and convert 25% of their energy consumption to renewable sources.
    • Emissions compared to Toyota’s 2013 levels.
  • Reduce water use levels by 3% per vehicle.
    • Compared to 2013 levels.
  • Introduce battery collection/recycling systems and end-of-life vehicle recycling programs by 2030.
    • Toyota also plans to develop technologies that use previously recycled materials in vehicle production.
  • Contribute to biodiversity conservation programs/activities, expand their in-house environmental initiatives, and offer nature education programs by 2030.

There are more details to their plans that I was not able to fully cover in this section, if you are interested in reading Toyota’s full plan click here (Page 16-19).

Obviously, ESG initiatives are not going to have a large impact on the stock prices (especially in the short term), however I thought that it was important to mention, and for investors to know. With that being said, we are about to get into the information that can help us determine potential price movements in Toyota’s stock.

Factors that contribute to Toyota’s stock:

Recent SEC Filings:

In order to get a good idea of the current state of Toyota, I have decided to go over their past 10 SEC filings. I will be picking out only the most important information from these filings and laying them out in an organized and digestible way.

Share Repurchases:

  • Toyota has authorized the repurchase of 2,286,300 shares in September 2021($201.55M USD)
  • Toyota authorized the repurchase of 13,358,600 shares in August 2021 ($1.15B USD)

Production Plans:

There has been a recent shortage in automotive parts in Southeast Asia due to both a decline in operations at Toyota’s suppliers, and a decrease in semiconductor supply (both due to the COVID-19 pandemic). Toyota has reviewed their production plans and has stated the following.

  • Toyota will not be lowering their revenue estimates for 2021
  • Toyota’s production estimates for September and October have decreased by 70,000 units, and 300,000 units respectively.
    • Toyota is also unsure of the potential effects of this in November and has not yet given an estimate
  • Toyota is suspending the operations of 10 of their 28 domestic production lines.
    • This affects 9 of their 14 production plants.
  • Toyota has previously suspended 27 of their lines in all of their 15 plants in August for the same reason.
    • These numbers have been decreasing since then, which is a good sign.
    • This had a large impact on the stock price of Toyota (-9%), however they quickly bounced back from this correction.

Financial Results:

Toyota has had quite the bounce back in 2021, as they:

  • Increased vehicle sales by 85% YoY.
    • Increased domestic vehicle sales by 30%.
    • Increased overseas vehicle sales by 113%.
  • Increased sales by 72% YoY.
  • Increased operating income by over 7000% YoY
  • Increased (pre-tax) income by 963% YoY
  • Decreased their expenses by $225M (USD)

Joby Aviation Merger Completion:

  • Joby Aviation consummated their merger on August 10th 2021, as part of this deal, Toyota’s shares were cancelled and converted into 3.4572 shares of Joby aviation (for Toyota’s role in funding the merger).
    • This resulted in Toyota’s post merger share balances of 78.75M shares, broken down as follows:
      • 87M shares are held by Toyota Motor Company (TMC)
      • 81M shares are held by Toyota’s A.I. Venture Fund
      • 5K shares are held by Toyota A.I. Venture (parallel) Fund.
    • This number of shares seemed too large until I found out that Toyota invested $390M in Joby’s Series C funding round at a valuation of $2B (implying an ownership stake of 19%).

My Valuation of Toyota Motors ($TM):

Comparable Analysis:

As part of my valuation process, I compared Toyota’s following financial ratios to their publicly listed competitors ($HMC – Honda, $F – Ford, $GM – General Motors, and $STLA – Stellantis).

D/E Ratio:

I chose to compare Toyota’s D/E ratio to their competitors because the auto industry is very capital intensive. The capital-intensive nature of the auto industry makes the D/E ratio important because it best measures auto companies financial health and their ability to meet their debt obligations. With that being said, Toyota’s fair value based off of their D/E ratio is $257/share, which implies a share price increase of 44.5%. This number is on the lower side as I decided to take out Ford’s D/E ratio, as theirs was a heavy outlier (5-6 compared to the average of 2.26).

ROE:

I chose to compare Toyota’s ROE ratio to their competitors because ROE shows how the company is operating. Not only is it a common ratio in the auto industry, but it also helps investors to measure how profitable a company is to them (the shareholders. By comparing this ratio, Toyota’s fair value is $217/share, which implies an upside of 22%.

P/B Ratio:

I used the P/B ratio to compare Toyota to their competitors, because the P/E ratios of their competitors varied largely, and I wanted to use a stable metric to compare these companies. By doing this, I arrived at the P/B ratio, which estimates Toyota’s fair value to be $112/share, which implies a downside risk of 37%.

I then took the average result of the 3 comparable ratios, which implies a total comparable valuation of $196/share, or a 9.8% upside potential.

DCF Model:

I projected Toyota’s financial performance over the next 10 years (to 2030) which included their FCF’s and projected their perpetual FCF’s based off of the risk-free rate of 1.474% (US 10-year yield). I then used the WACC (that I calculated in my model) to discount these FCF’s to today’s monetary value. By doing this, I arrived at a fair value of $TM – Toyota Motors of $226/share, which implies an increase in value of 27%.

My Investment Plan:

I believe that Toyota has the best upside potential under $180/share, and if I were to enter into a position, I would consider selling out at $211/share (avg of comparable valuation and DCF model). This plan would yield an upside of 18.41% which I think is realistic and attainable for Toyota in the coming months/years.

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