Pros and Cons to Buying Toyota Motor Corp (TM) Stock

Toyota Motor Corp has been around since 1937 (and in the U.S. since 1957), and even its very name indicates the company has been blessed with good fortune.

Originally, then founder of the company, Kiichiro Toyoda, wanted to name the company after himself, as in “Toyoda.” But fate intervened and Toyoda was convinced to go with “Toyota”, as the name only needed eight strokes to write in Japanese Katakana script, and eight is deemed a lucky number in Japanese lore.

Toyota caught another break from an unlikely source — the Korean War.

[See: 10 of the Best Stocks to Buy for 2019.]

In 1950, the automaker had only sold 300 trucks in June and was teetering on bankruptcy. But when the U.S. became involved in the armed conflict, it needed 5,000 trucks in Korea and turned to Toyota to build them, saving the company from financial ruin. Since then, Toyota has largely prospered as one of the biggest brand names in the business world.

For investors, the question on Toyota as 2018 draws to a close is this — will fortune continue to shine on Toyota stock (ticker: TM) in 2019?

Toyota Stock at a Glance

Toyota is trading at $120, with a one-year consensus target estimate of $143 per share.

The stock has bobbed and weaved all year, with a trading range between $114 and $141 per share, but it has slowly declined in value from a high of $138 per share in early January.

Toyota does offer an ample dividend payout, at 2.9 percent, and offers a sizable market cap of $171 billion with operating costs rising 11 percent on a year-to-year basis in the most recent quarter, thanks in large part to a significant cost-cutting campaign.

On the downside, Toyota was hit by a huge vehicle recall, focused on faulty airbags, affecting more than 1 million vehicles across the globe. Despite the ongoing cost-curbing campaign, Toyota did see overall sales decline in the last quarter, by 4.1 percent to 521,000 vehicles.

Sales look good, though, in the U.S. and Europe — two key markets for Toyota. North America income rose 12.9 percent for the quarter, while the company’s operating income doubled to 38.7 billion euros in Europe.

“Toyota’s in-line earnings announcement on Nov. 6 shows that the company is still very well-positioned in terms of scale and being one of the low-cost producers in the auto industry,” says Daniel Lugasi, a portfolio manager at VL Capital Management in Winter Park, Florida. “The company continues to return cash to shareholders with a $42 million share buyback announced. In the U.S., the company suggested a reduction of incentives, which points to the company forecasting positive sales trends in the second half of the year.”

Others note that Toyota is a household name and a global market brand known as a quality product.

“Yet the trade wars and exchange rate movements are important factors driving revenue,” says Anne Drougas, professor of accounting, finance and entrepreneurship in Dominican University’s Brennan School of Business. “Toyota is no exception. Value Line suggests that revenue estimates for Toyota could decline by 6 percent if the yen is weak relative to the dollar. Yet, Toyota’s board approved stock repurchases, which could add about 5 cents to earnings per share.

“By comparison, Ford’s ( F) stock price has shed about 30 percent of its value and is experiencing sales declines specifically in Asia-Pacific countries,” Drougas says.

Pros to Buying Toyota Stock

Lugasi says that while he’s cautious on the global auto sector, in general, he’s bullish on Toyota.

“The record growth in global autos over the past several years cannot continue forever and with interest rates in the U.S. creeping up, it could have a dampening effect on auto financing volume going forward,” he says. “What really gets us excited about Toyota stock is the potential benefits that will come from the transformation of the global auto industry.”

In particular, a joint venture announced in October by Toyota and Softbank to develop a self-driving car service is a “huge step” toward shaping the future of the auto business, Lugasi says.

“Additionally, the joint venture gives Toyota access to Softbank’s portfolio companies that are overwhelmingly focused on technology,” he says. “Joint ventures, such as this one, are very forward-thinking and will likely lead Toyota to be first to market with a successful autonomous vehicle service.”

So while Lugasi remains somewhat cautious on the prospects for the global auto industry going onto 2019, given the rapid rate of growth over the past few years, he’s all in on Toyota stock. “We are bullish of Toyota given the steps they are taking to become a major player in the mobility-as-a-service industry,” he says.

[See: 7 Great Ways to Invest in Electric Vehicles.]

Other investment professionals also view Toyota in a positive light.

“Toyota is looking pretty good at this price point, provided the global economy continues to hum along fairly well,” says John Engle, president of Almington Capital Merchant Bankers in Illinois. It has many opportunities for growth in its current markets, especially China. China presents an interesting opportunity for Toyota, as well as other non-U.S. automakers.

“The country’s retaliatory tariffs against American trade policies make other imported vehicles look more attractive,” Engle says.

Cons to Buying Toyota Stock

If anything is at the top of the list that’s holding Toyota and the auto sector back, it’s a slowing economy.

“Global economic growth is slowing, leading to plateauing global auto sales,” says Chris Trompeter, managing director at Tradition Capital Management in Summit, New Jersey.

Additionally, Toyota has seen declining sales in the past month, as have most other automakers. “Likewise, auto dealerships in the U.S. have reported falling sales in October,” Engle says. “If that trend persists, the whole auto industry could be looking at a down cycle.”

Engle says he’s not buying Toyota right now, or expanding positions in any other auto stocks, given the apparent softening demand. “If another down cycle does commence, there will be better opportunities to buy,” he says. “That looks increasingly likely, given sales data and indications of broader economic headwinds in the U.S. and globally.”

The Bottom Line on Toyota Stock

If investors exhibit some patience on the auto sector, Toyota’s geographic and product breadth, financial strength, reputation for quality, efficiency, leadership position in hybrid/electric vehicles should help maintain its strong competitive position, Trompeter says.

[See: 9 Overseas Dividend Stocks to Buy Now.]

“Toyota is focused on reducing their costs and returning the free cash flow they generate to shareholders through dividend increases and share repurchases,” he says. “We believe Toyota’s stock is undervalued and have purchased it for clients utilizing our dividend value equity strategy.”

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