Is Toyota stock a buy or sell after recent earnings? (NYSE:TM)

Toyota Profits More Than Double

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Toyota Motor Corp (TM), one of the largest automobile manufacturers in the world, is known for its best-in-class car models, renowned for their quality and reliability. While the business has faced disruption during the pandemic, the story of the past year has been one of strong recovery driven by record demand while continuing to move forward with an expansion plan of its electrified vehicle offerings. Indeed, the company has just released its latest quarterly result which beat expectations despite some ongoing production challenges related to global semiconductor shortages. With the stock correcting amid the current market volatility, we are bullish on TM which is well positioned to rally, supported by broadly strong fundamentals and a positive long-term outlook.

TM table

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How were Toyota stock earnings?

Toyota released its fiscal Q3 results on February 9 with a net income of 791.7 billion yen representing approximately $6.9 billion. Although the result was around 6% lower year-over-year, the 2-year comparison as a pre-pandemic benchmark with net profit up 42% over the period highlights the strength underlying business. Revenue this quarter, at 7.8 trillion yen or $67.7 billion, was down 4.5% year-on-year, but up 19% in the first nine months. This considers that the last quarter experienced a more difficult period of comparison in 2020 during the first phases of the dynamic of “reopening” which was particularly strong.

TM Earnings

source: IR company

The momentum spanned all regions and segments, including China and Financials, contributing to the profitability trend. As mentioned, supply chain shortages have been a production-limiting issue, echoing an industry-wide trend across automakers. In this respect, the latest results here are even more impressive given that sales revenue increased by 2.3% compared to the quarter of 2019, even if the 2.003 million vehicles sold this quarter fell by 9% on the period and 14% over one year.

The key point here is that the retail consumer demand is there, but Toyota just can’t make the models fast enough. High prices and limited discounts from marketing efforts helped sustain profitability. From the chart below, a significant development was the growing importance of electrified vehicles (EVs) within the Toyota and Lexus brands, which now account for 27.8% of all retail sales in the quarter. compared to 23.2% in 2020 and 19.4% in 2019.

TM sales

source: IR company

To be clear, a large portion of electric vehicle sales are hybrids (HEVs) at 609,000 units in the quarter, up from 588,000 last year. Toyota has shown a preference for hybrids given their fuel efficiency advantage and ease of adoption by not requiring recharging. That said, the long-term strategy is to add battery electric vehicles (BEVs) which are still only a small part of its lineup with just 5,000 units sold in the quarter compared to 2,000 last year and 0 in 2019. model year”bZ4Xwill be a consumer BEV that is expected to appear in dealerships later this year. The company expects the proportion of electric vehicles as a percentage of total sales to continue to rise based on consumer demand.

Toyota bz4x

source: IR company

2022 Toyota tips

Management made some updates to its full-year 2022 guidance, revising total revenue down to 29.5 trillion yen from 30 trillion yen, citing “production instability.” Nevertheless, the result if achieved would still be up 8% compared to 2021.

The company also believes it can maintain high margins through pricing efforts given the operating margin target at 9.5% versus 8.1% last year. Net income is expected to be flat year-over-year, but likely to improve heading into fiscal 2023.

TM guidance

source: IR company

Toyota expects full-year consolidated vehicle sales of 8.25 million units, down from a previous estimate of 8.55 million, but still up from 7.646 million in the last year. Importantly, the outlook for electrified vehicle sales this year is unchanged at 2.65 million units representing 28.2% of the Toyota and Lexus brands at retail, compared to 23.7% last year. BEV sales at 15,000 units versus 6,000 last year, an increase of 150%.

Toyota Electric Vehicles

source: IR company

Is Toyota stock a good long-term investment?

One of the criticisms of Toyota is that the company has been slow to move towards electric vehicles, which contrasts with other traditional manufacturers like Ford Motor Company (F) or even Germany’s Volkswagen AG (OTCPK:VWAGY) who took an “all inclusive”. Over the past decade, the momentum that electric vehicle leader Tesla, Inc. (TSLA) has captured has likely come as a surprise to many, including Toyota management, which appears to have misjudged consumer demand and accelerated global penetration.

Nevertheless, his last message was a more concerted strategy to produce 3.5 million electric vehicles per year by 2030 while making the Lexus brand 100% EV. That said, beyond environmental concerns, we believe it is worth continuing to serve the ICE (internal combustion engine) market with affordable and reliable vehicle options for different markets. Toyota’s hybrids are recognized as a fuel-efficient option by automatically charging a smaller internal battery based on regenerative braking with a small engine may represent a middle ground for a segment of consumers who are hesitant to take the plunge immediately. at full EV.

Our view is that Toyota’s balanced approach to transitioning to electric vehicles while supporting ICE technology continues to represent an opportunity for growth. The effort has resulted in stronger overall profitability compared to a peer group that we include Honda Motor Co., Ltd. (HMC), General Motors Company (NYSE:GM)Nissan Motor Co., Ltd. (OTCPK: NSANY), Volkswagen AG and Ford given Toyota’s operating margin of 10.4% in the past year compared to the group average.

Data by Y-Charts

While all automakers have faced supply chain shortages, Toyota’s production numbers have been more resistant compared to other manufacturers who have faced larger production declines, especially last year. Toyota’s higher underlying profitability translates into an earnings premium given its EV to EBITDA ratio at 7.8x versus 6x for Honda and GM or 5x for Ford. We believe the gap is justified given Toyota’s leading position as a global leader best-selling automaker.

Data by Y-Charts

With some limited consensus estimates available, the forecast is that Toyota’s revenue will reach $297 billion for fiscal year 2023 “next year”, representing a 16% increase from management’s current forecast for the year. fiscal year 2022, or approximately $256 billion at the current exchange rate. It is understood that as supply chain conditions improve in 2023, margins and profits may accelerate upwards. The 2022 EPS forecast at $18.67 and $23.45 for 2023 implies a forward P/E of 9.8x and a 1-year forward P/E of 7.8x. We believe there are upsides to this outlook, particularly on revenue, with the feeling that management’s guidance this year is rather conservative.

TM estimates

source: In search of Alpha

Is TM stock a buy, sell or hold?

There are several reasons to be optimistic about Toyota Motor. The attraction here is the brand name enjoying a loyal customer base, which provides a natural context of high demand for any future EV offerings with the Toyota or Lexus badge. Even though the company has not been a leader in battery-powered electric vehicles, its strategy to scale up in this direction is credible given its global infrastructure and manufacturing expertise. With this move, the company maintains strong growth prospects and is well positioned to consolidate its global market share.

We rate TM shares as a buy with a price target of $235.00 for the year ahead, representing a 1-year forward P/E of 10x on current consensus EPS for the year 2023. Based on the chart below, TM shares have been trending from the depths of the pandemic in 2020. Our call here is for this trend to continue and the latest pullback from a high of $212 early January now represents a new buying opportunity.

TM table

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Amid all the headlines of macroeconomic concerns, high inflation putting pressure on consumer discretionary spending and rising interest rates; we take a more optimistic view. That said, there are risks to consider. A deteriorating global growth outlook with an eye on developments in Eastern Europe with the Russian-Ukrainian conflict has the potential to undermine the stock’s bullish scenario. Weaker-than-expected earnings, below management’s expectations, would also open the door for the stock to decline with a reassessment of long-term earnings prospects. Tracking points over the next few quarters, including production and sales levels, operating margin, as well as any updates on BEV strategy.