Oct 3, 2021
[6 min Read]
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.).
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:
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.
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.
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 has had quite the bounce back in 2021, as they:
Joby Aviation Merger Completion:
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).
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).
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%.
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.
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.