It might just be time to invest in the sprawling incumbent vehicle company.
The world’s incumbent carmakers aren’t really anyone’s idea of market-crushing investments these days. Despite some improvement in their share prices recently, the globally recognized companies that trade on U.S. exchanges have underperformed the S&P 500 index so far this year, at times considerably.
One of those laggards is the top Asian auto powerhouse, Toyota Motor (TM 2.87%). In numerous ways the storied Japanese company just can’t catch a break lately, but it’s cheap on certain valuations. Perhaps its stock is a contrarian buy at a time when Big Auto isn’t particularly hot on the market.
Of strong and weak markets
Since it is very much a global manufacturer, Toyota is always subject to the whims of its regional and national markets. In the first six months of this year, that was a good news/bad news situation. Indisputably good was the company’s retaining its title of No. 1 carmaker worldwide in terms of unit sales, with a cool 5.16 million vehicles exchanging hands in the period.
That figure, however, was nearly 5% below that of the same period of 2023. The domestic market was a bit of a land mine for Toyota, as its Daihatsu small-car division became embroiled in a testing scandal that led to a halt in shipments for several months. Toyota’s total unit sales decline in Japan was ugly, with a 32% year-over-year swoon.
The vast, ever-tempting market of China was also a disappointment, as sluggish economic growth, intensifying competition, and significant government support for domestic carmakers put on the hurt. Toyota’s six-month sales there cratered by almost 11%.
Thankfully for the company and its shareholders, there were better markets elsewhere. Many have considered Toyota to be something of an outlier because of its reluctance to produce an expansive fleet of pure electric vehicles (EVs). But EVs aren’t the hot items they once were, and Toyota — which concentrates on selling traditional internal combustion engine (ICE) and EV/ICE hybrid models — offers an attractive value proposition.
That’s because some EVs are still very pricey, despite recent discounts. Buying a luxury EV like the Tesla Model S, for instance, would set a buyer back at least $68,490.
Many new car shoppers clearly preferred models like Toyota’s upscale, and far cheaper, Lexus. It’s no wonder the Japanese company’s Toyota and Lexus models together booked a robust North America sales gain of nearly 15% in that half-year stretch. The dynamic was similar in Europe, where hybrid models have proven to be popular. Toyota’s sales rose by just over 10% on that continent.
A slump before the bump
Those kinds of positive numbers might be challenging to achieve now, and in the near future. In early August the Bank of Japan cranked its benchmark interest rate higher, from 0.1% at most to 0.25%. It was the first increase of any kind from the monetary authority since 2007. As typically happens with such bumps, many investors and businesses have piled into the yen, strengthening it considerably. It has yet to weaken to any serious degree.
Meanwhile, management is busy enacting a strategic shift. It wants not only to ramp up production of hybrids, but also devote more resources toward developing other green vehicles such as those that run on hydrogen, of which it’s a leading developer. If the monster EV growth story is truly over, Toyota will be nicely positioned to benefit with its alternatives.
There’s a “but,” though, with this retrenchment and the suddenly mighty yen. Analysts tracking Toyota are expecting a dip in profitability this year before a bit of a bounce back in the next. They’re modeling $21.71 per each of the company’s American depositary receipts (ADRs) for the entirety of the current fiscal 2025, down from the $22.58 of the previous year. The slump shouldn’t last, as those pundits are collectively projecting a $22.85 per ADR recovery in fiscal 2026.
Another plus: Rather atypically for an industrial company with heavy costs, Toyota reliably pays a dividend. These days the payout yields just under 2.2%, which isn’t going to make anyone a billionaire, but is more generous than the current 1.3% average of S&P 500 component stocks.
I like what I see with Toyota. I think the company has a strategy that, although once considered contrarian and out-of-date by some, has proven to be viable. The relatively strong yen isn’t going to do the company any favors, however its vehicles and its technology are popular, and I think sticker shock will be limited. The Japanese auto giant knows its business cold, and it’s sure to remain a pace-setter for many years. I’d be a buyer of its stock, particularly at the current price.
