I've been watching Toyota Motors (TM, Financial) and I think that it stands at a crossroads right now. In terms of electrification, the company is making great progress, and hybrid and electric vehicles have impressive sales percentages. However, the FY2025 first-half results showed some problems. Even if the revenues slightly increased, the operating income plummeted. This was mainly due to unfavorable movements in the exchange rates, an increase in the cost of raw materials and growing competition in markets such as China. It is important that investors proceed with caution. In simple words, you won't likely see its stock price skyrocket anytime soon. Taking a long-term view, Toyota's effort into electric vehicles could yield good returns over time. However, it might still require a few years before the company can compete with other stalwarts that operate in the EV space. Just keep an eye out for further electrification products and services as they may turn into gold as the sector continues to mature.
Company overview
Toyota manufactures and deals in motor vehicles and parts. It operates through the following segments: Automotive, Financial Service, and all other industries. The ‘Automotive' segment involves designing, manufacturing, assembling and marketing passenger cars, minivans, trucks and other car-related spare parts and accessories. It is involved in the development of intelligent transport systems.
Source: Company Financials
The ‘Financial Services' segment provides either buying, leasing or financing for Toyota vehicle dealers as well as customers. It also offers retail leasing through lease contracts purchased by dealers. In the ‘All Others' segment of the company, it undertakes the design, manufacture and sale of housing, telecommunication and the remaining businesses.
Toyota's mixed results as it tackles industry challenges
Looking at Toyota's financials for the first half of FY2025, one gets an impression of a company facing general industry issues while building on operational advantages. Consolidated vehicle sales for the first half of FY2025 decreased 4% YOY to 5.03 million units, but the company's revenues reached ¥23.28 trillion, up by ¥1.3 trillion YOY. Full electric models constituted 44.4% of the retail sales compared to 35.3% in the corresponding period of last year, where HEVs constituted 2.08 million units up by 22.6% on an annual basis.
However, reported and calculated profits pointed to an average picture. Due to the increasing costs, operating income was reduced to ¥2.46 trillion, ¥95 billion less than last year, and operating margin was trimmed from 11.6 % to 10.6%. The devaluation of the yen to 153 against the dollar and 166 against the euro significantly reduced other revenue by ¥694 billion. Higher raw material inflation and greater one-time charges also influenced the outcome. Toyota made ¥210 billion in cost reduction and ¥80 billion in marketing savings, but they were not enough to entirely offset the impact of headwinds.
Regionally, Toyota perceived more stability. North America and Asia posted vehicle sales figures of 905,000 and 1,350,000 units, respectively, which was above 97% of the previous year.
Source: Company Q3 Earnings Report
However, Chinese operations were found to be a problem area as their operating income decreased to ¥37.7 billion, a drop of 86%, owing to rising competition and changing customer trends. This decline signals weakness in an ever more important region but seeing Toyota's seeing geographical presence an impression that it is not too sensitive to regional losses.
Toyota's response to China's growing EV dominance
Chinese automakers are a formidable challenge. Brands such as BYD (BYDDF, Financial), NIO (NIO, Financial) and XPeng (XPEV, Financial), with their ability to quickly bring in affordable, feature-rich EVs have launched globally. The urgency of Toyota's countermeasures is made evident by the fact that BYD's imports to Japan alone were up 184% annually in the first half of 2024.
To counter China's rise in the EV market due to the companies mentioned above, Toyota has responded with a forward-moving strategy to keep itself competitive. This strategy is built on the cornerstone of building a new EV battery plant in Fukuoka Prefecture, Kyushu. This area, sometimes called "Silicon Island" is filled with advanced automotive and semiconductor industry, giving Toyota the benefits of an established supplier network and possible government subsidies. By integrating its battery production with its nearby Miyata assembly plant, Toyota wants to streamline logistics, reduce transportation costs, and increase production efficiency. Toyota is using Kyushu's location and resources to help drive competitiveness and align with sustainability goals, including carbon-neutral manufacturing and battery recycling.
This is a part of Toyota's wider electrification plan, which entails a jaw-dropping $32 billion investment by 2030. It wants to sell 3.5 million EVs every year by 2030, a huge increase from the 104,000 EVs it sold in 2023. This vision is reliant on Lexus, Toyota's luxury division, which is anticipated to be fully electric by 2035.
A closer look at its valuation
The company's P/E ratio is 7.93, compared to its industry average of 19.49. Within the past year, TM's Forward P/E has been as high as 11.67 and as low as 7.43, with a median of 9.49.
Source: Author created based on historical data
The PEG ratio of TM is also 0.71 compared to the sector median of 0.76. This is a very popular metric, similar to the widely known P/E ratio, except that it also includes the company's expected earnings growth rate.
In addition, I must highlight TM's P/B ratio of 0.96. A P/B ratio is used to compare the stock's market value to its book value, which is the total Assets less than total Liabilities. This stock's P/B is cheaper than its industry's average P/B of 2.24. While there are more metrics to consider than these, the above data should indicate that Toyota Motor is a value play right now.
Now, let's put this in context by looking at some of the bigger names in the industry like BYD and Tesla (TSLA, Financial). Toyota's forward P/E is significantly below BYD's 15.08, reflecting the valuation of a premium growth stock. Meanwhile, Tesla trades at an even loftier valuation, with a forward P/E often exceeding 158.8, making it over 15 times more expensive than Toyota. Similarly, BYD's PEG of 1.07 and Tesla's PEG of over five means that Toyota's PEG of 0.71 is much more attractive to investors seeking earnings growth at a lower price than others. The same goes for the P/B ratio, in which BYD's 4.26 and Tesla's 15.27 are nowhere near as appealing as Toyota's 0.96. This contrast highlights that Toyota remains undervalued among the three.
Source: Author created based on data
In contrast, two other key players in the industry, General Motors (GM, Financial) and Nissan Motors (NSANY, Financial) give strong competition to Toyota in terms of valuation. GM's forward P/E clocks in at 5.80 and Nissan's at a much better 5.08. Similarly, GM's and NSANY's PEG ratios are both near Toyota's PEG of 0.71. GM's 0.86 and NSANY's 0.22 multiples in terms of P/B ratio also indicate that investors are prepared to pay more to buy these stocks based on their future growth prospects.
The valuation metrics of GM and Nissan indicate that the TM stock may have a tough time closing the valuation gap, at least in the short term.
A cautious rebound
Toyota Motor has seen roller-coaster price action so far in 2024. Toyota stock skyrocketed from January to March, but since the spring shares have dropped around 31% from their 52-week high.
The price chart shows a decline of 5.95% YOY in Toyota's stock which is a rather subdued performance against broader industry peers. The stock saw frequent fluctuations, from a 52-week high of $255.23 to a 52-week low of $159.04 and currently hovering around $175.83. It now falls close to the lower quartile of its yearly range, which puts it near the undervalued area if fundamentals continue to be intact.
From mid-2024, it has a peak in the price movement pattern and then follows a steady decline to a consolidation period in recent months. Consolidation phases are frequently a potential reversal, as generally consolidation usually occurs when sellers lose momentum and buyers step in. The end of the chart looks to be a little less volatile, suggesting that investor sentiment may be stabilizing, and with a little positive catalyst, could be setting up for a bullish rebound.
Adding to this, Wall Street analysts have remained bullish on Toyota, with a consensus call to 'Buy' and a potential upside of 34.44%. Analysts are probably betting that Toyota can ride out the current economic turbulence brought on by rising input costs and fluctuating demand and that it will capitalize on its strong brand and technological edge.
Source: Wall St. Analysts' Rating (Seeking Alpha)
I believe that the support zone around the $160–$165 range looks strong, as the stock bounced off of this level in mid-2024 before the rally to its yearly high. A reversal could be launched from this support zone if the company delivers good earnings or announces new strategic initiatives. The $200–$210 range is a key level on the resistance side. Toyota might need more time to break past key resistance levels of $200 – $210. This outlook suggests that while Toyota has long-term growth potential, investors will see volatility for a while.
Takeaway
Given how much Toyota's stock is currently valued and its transition to electrification, it is a compelling play for long-term investors. However, I would like to urge caution in the near term given market volatility, particularly in key regions such as China, mixed financial results, and short-term fluctuations in stock price. Toyota's fundamental strength, including its commitment to $32 billion in EV growth and a P/B of 1, points to its potential. However, its ability to execute on its big ambitions given the intense competition from Chinese automakers like BYD is uncertain.
Toyota, of course, has a financial outlook that is both resilient and challenging. The stock is well positioned for long-term growth as its focus is on hybrid and electric vehicles, but short-term pressures suggest continued volatility. Investors may wish to hold onto the stock until clear signs of recovery are evident.
