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Toyota Motor Corp. ADRs $120 – New York symbol TM

TOYOTA MOTOR CORP. ADRs $120 (New York symbol TM; Conservative Growth Portfolio, Manufacturing & Industry sector, WSSF Rating: Above average) is Japan’s largest carmaker.

The company is gaining market share, and will likely overtake General Motors as the world’s largest carmaker in terms of vehicles produced within the next few months.

Toyota operates plants in Japan, the United States and 21 other countries. Sales outside of Japan account for two-thirds of its revenue.

In its second fiscal quarter ended September 30, 2006, Toyota earned $2.17 per ADR (total $3.5 billion), up 29.2% from $1.68 per ADR ($2.7 billion) a year earlier. (Each Toyota American Depository Share represents two of Toyota’s common shares.) Sales grew 12.3%, to $50.3 billion from $44.8 billion.

Much of Toyota’s recent success is due to its smaller, fuel-efficient cars. Strong demand for these vehicles in developing countries like Brazil, Russia, India and China should increase the company’s share of the global automobile market, from 11% to 15% by 2010. It also plans to build more cars in those countries, which will help keep costs down.

In the U.S., Toyota plans to expand its share of the pick-up truck market. It just opened a new $1.2 billion plant in Texas to build its revamped Tundra truck.

Right now, Ford (see box this page) trucks outsell the current Tundra by a 7-to-1 ratio. But Toyota hopes this new model will help expand Tundra sales by 60%. That’s good news, since profit margins on trucks are much higher than on regular cars.

The company continues to enjoy strong demand for its hybrid-engine cars, including the popular Prius compact.

Although Honda started selling its hybrid car in the United States two years before the introduction of the Prius, Toyota has had much more success. In fact, other carmakers prefer to license Toyota’s technology instead of developing their own hybrid engines.

The stock has gained 71% since we first recommended it at $70 in our June 2004 issue. It now trades at 14.6 times the $8.25 per ADR that it will probably earn in fiscal 2007.

The rising Japanese yen could cut Toyota’s revenue and profit growth, but its plan to build more cars outside of Japan helps offset this risk. The $1.55 dividend yields 1.3%.

Toyota is a buy.

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