TOYOTA MOTOR CORP. ADRs $116 (New York symbol TM; WSSF Rating: Above average) is Japan’s largest automobile maker, and the world’s second-largest after General Motors. Sales outside of Japan account for 60% of the total. Toyota also makes industrial equipment such as forklifts, and pre-fabricated housing. Like most automakers, it offers vehicle loans through its financing division.
Each Toyota ADR represents two of Toyota’s common shares. Japan imposes a 15% withholding tax on dividends paid to U.S. stockholders.
Toyota’s sales grew from $106.4 billion in 2001 (fiscal years end March 31) to $172.7 billion in 2005. Profits slipped from $2.92 per ADR (total $5.4 billion) in 2001 to $2.28 per ADR ($4.2 billion) in 2002, but jumped to $6.66 per ADR ($10.9 billion) in 2005.
Stock up by 66% in two years
We first recommended Toyota at $70 in our June, 2004 issue, and the stock has gained 66% since. It now trades at 17.0 times the $6.81 per ADR that it probably earned in fiscal 2006. The $1.16 dividend yields 1.0%.
Much of Toyota’s success is due to its strong attention to quality and reliability, which have helped it build up a loyal customer base. This has let Toyota avoid the need to offer costly rebates and other incentives to boost sales. Consequently, it now has close to 14% of the U.S. auto market. It will likely surpass its goal of 20% by the end of this decade.
To reach this target, Toyota is expanding its North American operations. It currently operates 14 plants here, and plans to build at least one new assembly plant in the next few years.
The company ultimately hopes that 75% of its North American sales will come from local plants.
This strategy helps shield Toyota from foreign currency exchange swings, particularly as the higher Japanese yen means that profits from its U.S. operations now translate into fewer yen.
New technologies spur growth
The company spends about 5% of its revenue on research, which hurts its short-term profits. But this spending has helped Toyota take the lead in several new automotive technologies like the hybrid gasoline-electric engine.
Thanks to surging fuel prices, demand for hybrid vehicles is rising strongly. The company is also earning money by licensing its hybrid technology to other automakers. It is also adapting its cars to use higher concentrations of ethanol in new blended gasolines.
Conservative balance sheet cuts risk
Toyota’s strong balance sheet should help it fund these initiatives. Long-term debt is a reasonable 55% of stockholders’ equity, and it has $10.15 per ADR in cash. Ongoing efficiency programs should also free up more cash for new investments.
Toyota is a buy.
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