Toyota’s weakness: Losing share
Toyota’s history is one of growth. Over the past 30 years, Toyota (TM) successfully entered a new market segment and took market share in the U.S., the largest market in the world. The world changed.
China is now the largest automobile market in the world. Toyota is weaker in China. Volkswagen (VOW) is the market leader, with approximately 13% of the market. Competitors are taking market share. In the above chart, Toyota is the blue line, with a downward slope from 2009 to 2011. Over this period, Hyundai and Volkswagen (VOW) gained market share. While, in the last year, Toyota gained market share, the industry is competitive and the next competitor could come out with a product that moves the share slices. The majority of Toyota’s sales are in Japan and the U.S., while in the global growth engine of China, Toyota is underrepresented.
A threat from Google
A longer-term risk is the self-driving car from Google (GOOG). Recently, Google announced that it would manufacture the cars itself. Previously, the company would retrofit a Toyota with its gear. Google has the capital to do whatever it wants. If it wants to sell cars, it could. Think of this as the next step past the Tesla (TSLA). Tesla is technology wrapped in style. Google can bring the battery-powered car to the mass market—and it drives itself. Driving is a chore—better to turn it over to computers. It’s heady stuff. This is a medium-term risk, but one to keep an eye on.
We’ve seen that Toyota isn’t not the highest-margin company in the industry, but it is the highest generator of free cash flow in the industry. The free cash flow allows Toyota to invest in research and development for new technologies and spend to improve operating efficiency globally.
Where’s the opportunity for Toyota? Its debt trades along its AA- ratings while the rest of the original equipment manufacturers are A- or lower-rated. As we saw earlier in this series, the company’s enterprise value to EBITDA is near 9.3x and near the multiple of stronger competitors. So, it’s difficult to say Toyota is undervalued. However, Toyota is a well managed company that should be able to remain among the top three global automobile manufacturers and grow as the industry grows. Toyota’s dividend yield is 2.2%. Considering the ten-year bond is paying 2.6% today, you get paid to hold it. Alternatively, you could purchase the exchange-traded fund CARZ.