Published : Sept. 10, 2012 - 20:40
Lexus vehicles sit in a lot awaiting shipment at Toyota Motor Kyushu Inc.’s Miyata plant in Miyawaka City, Japan. (Bloomberg)
Toyota Motor Corp. , roaring back after three years of recession, recalls and natural disasters, will struggle to regain its former dominance as it grapples with improved competition worldwide.
Under Chief Executive Officer Akio Toyoda, the company’s profits are rising, it’s on pace to regain the global sales lead this year, and its $138 billion stock-market value is more than the next two biggest, Volkswagen AG and Honda Motor Co., combined. Still its shares aren’t as highly valued as they were before the crises and the resurgence of once-feeble U.S. rivals.
Investors are less enthusiastic about owning Toyota, relative to its size and peers, than they were from 2003 to 2007. The price-to-sales ratio, which shows the value investors place on each dollar of revenue, reflect concerns about the Japanese automaker’s ability to increase profits now that its quality lead is less pronounced against U.S. and Korean peers such as Hyundai Motor Co.
“Hyundai is now a tough rival to tackle in that they’re better recognized by the world now,” Takashi Aoki, a Tokyo- based fund manager at Mizuho Asset Management Co., said in a phone interview. “The market sees Hyundai as being a competitive company against Toyota.”
U.S. automakers are also gaining ground on Toyota. General Motors Co., restructured in a 2009 bankruptcy, this year earned its best scores in J.D. Power & Associates annual study of new- car quality, the bellwether analysis that helped establish Toyota and Honda’s reputations in the U.S. for reliability. Two years ago Ford Motor Co.’s Ford brand ranked fifth; this year Chrysler Group LLC improved more than most.
Recall’s Aftermath
Toyota executives seared by the recall of millions of vehicles two years ago on reports of unintended acceleration have made at least one willing tradeoff that suppresses its value relative to peers. To keep tighter control on quality, Toyota is keeping more manufacturing in Japan even as a strengthened yen reduces profit on sales made in North America.
“Toyota’s yen-based manufacturing is obviously the biggest concern weighing on Toyota’s shares,” Aoki said.
Investors are willing to pay more than twice as much for shares of Seoul-based Hyundai compared with Toyota’s based on price-to-sales ratios, and 12 percent more relative to earnings before interest, taxes, depreciation and amortization.
Steve Curtis, a New York-based spokesman for Toyota’s North American unit, declined to comment on the change in the relative value of the carmaker’s shares.
“Our view is that the best way to build shareholder value is to focus on satisfying our customers,” Curtis said.
Lost Advantage
Quality ratings show Toyota again ranking at or near the top among mass-market brands after its stumble two years ago, based on assessments by J.D. Power & Associates and Consumer Reports magazine. At the same time, the industry has improved across the board, minimizing a defining advantage that had allowed Toyota to charge higher prices and earn greater profits.
Demand for Camry sedans in the U.S. and Prius hybrids in Japan have pulled Toyota out of a slump stretching from late 2008 through last year. Through the first half, Toyota’s global sales grew 34 percent to 4.87 million cars and trucks, topping General Motors Co., which took back the title last year. The Japanese automaker plans to sell a record 9.76 million in 2012.
The company’s net income jumped to 290.3 billion yen ($3.63 billion) for the quarter that ended June 30, higher than analysts anticipated and almost double the $1.85 billion GM reported in the period.
Those gains are being curbed by persistent strength in the yen relative to the U.S. dollar, undermining Toyota’s 30 percent sales growth in the U.S., previously its most profitable market.
Yen Burden
“We went through an economy that tanked; an industry that dropped 40 percent; a recall crisis; and all the natural disasters, one after another,” Mark Templin, global marketing chief for Toyota’s luxury Lexus brand, said in an interview in Palo Alto, California, last month. “But the biggest challenge we face, that we’ve ever faced, is the currency.”
The stronger yen makes it harder for companies to make vehicles in Japan and sell them profitably in the U.S., which encourages more North American manufacturing.
The Japanese currency strengthened 45 percent over five years, as of Friday, the most of any major currency tracked by Bloomberg. Over the same period, the South Korean won weakened by 17 percent, the second-most among major currencies.
That’s particularly beneficial for Hyundai, said Yuuki Sakurai, chief executive officer at Tokyo-based Fukoku Capital Management Inc.
“With the currency, Toyota is in a disadvantaged position compared to Hyundai,” said Sakurai, whose company manages 1.5 trillion yen of assets.
‘Highly Valued’
Hyundai’s improved styling and features also make the company attractive, he said.
“Hyundai is rapidly gaining ground in various markets of the world, and the gap between people’s impression of Hyundai and Toyota is narrowing,” Sakurai said. “Hyundai’s cars are now highly valued for their design and quality, not just competitive pricing.”
Toyota this year has announced plans to boost vehicle and engine output at plants in the U.S. and Canada and to increase purchases of North American parts and materials.
CEO Toyoda also pledged the company founded by his grandfather would keep 3 million units of plant capacity in Japan, a higher portion of its global production than Nissan Motor Co. and Honda Motor Co. This decision reflects Toyota’s efforts to re-establish its quality reputation, said Kevin Tynan, an automotive analyst at Bloomberg Industries.
‘Conscious Decision’
“Toyota isn’t chasing short-term profitability,” he said. “They’ve made a conscious decision not to move quickly to set up factories in low-cost production countries like Mexico. It’s more important to them to keep tight control of quality over the long term.”
Toyota’s biggest domestic competitors have moved more quickly to expand capacity in North America, with Honda in particular preparing to build almost all of its models sold in the U.S. at plants in the U.S., Canada or Mexico.
“Japanese automakers’ share prices, including Toyota’s, have not risen as much as what their growth and recovery figures show for this year,” said Lee Sang Hyun, an analyst at NH Investment & Securities Co. in Seoul, who rates Hyundai a buy. “The strong yen is one reason, and it’s also because the profit margins haven’t really recovered with the production rate,”
Shrinking Premiums
Investors are paying twice as much for Toyota shares as for Ford and 54 percent more than for VW, based on price-to-sales ratios. Toyota commanded a relative premium of at least five times Ford’s share price and three times that of VW until 2006, based on price-to-sales ratios.
Such comparisons don’t fully account for regional differences, said Stephen Usher, a San Diego-based analyst for JI Asia, who has ratings of buy for Toyota and neutral for Hyundai.
“It’s very difficult to make straight comparisons across borders,” Usher said. “What drives individual stock markets and the stocks in those markets is very different. The investor base is very different.”
Other comparative ratios indicate Toyota’s value has improved compared with Hyundai’s in the past five years. There’s a 96 percent premium for Toyota relative to Hyundai based on the company’s enterprise value to trailing 12-month Ebitda, up from a 64 percent premium five years ago.
Hyundai’s Constraints
Toyota remains among the world’s best-funded automakers, with cash and short-term investments worth more than $38.3 billion at the end of June.
That compares with $16.2 billion for Hyundai, while Ford held $35.6 billion, and Volkswagen, which acquired Porsche AG’s auto business last month, reported $34.1 billion in cash and short-term investments.
Toyota also retains the best credit profile among global automakers, with long-term debt ratings of Aa3 from Moody’s Investors Service and AA- from Standard & Poor’s Ratings Service.
Hyundai this year is capacity constrained after three years of rapid growth, Usher said.
“Hyundai is in a period of consolidation and Toyota is a period of recovery,” Usher said. “Hyundai is not full speed ahead in any market other than Europe right now.”
Not until next year will Seoul-based Hyundai be ready to resume its previous pace of expansion, he said.
“From late 2013 and into 2014, I think the development of the companies is going to be more similar,” Usher said. “That’s when the true battle will be engaged.”
(Bloomberg)