Toyota Motor Corp.
St. John’s University
Graduate Student Managed Investment Fund
Presents:
Toyota Motor Corp.: TM
Analysts: Mengxi Cao ( mengxi.cao11@stjohns.edu
)
Nicoleta Stanca (
Wei Liu ( nicoleta.stanca12@stjohns.edu
wei.liu12@stjohns.edu
Xiyue Tao (
) xiyue.tao12@stjohns.edu
)
)
Share Data:
Fundamentals:
Price: 12/6/13 $122.74
Shares Outstanding: 1.65B
P/E12/6/13: 13.11x
Forward P/E: 9.85
Market Cap: $208.817B
Beta: 0.821
52 Week Range: $85.00-$134.94
EPS2013: $7.33
E[EPS2015]: $11.87
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Contents
2
1
．
Executive Summary and Recommendation
1.
Abenomics have positive influence on Toyota.
Toyota, which earns more profit than General Motors Co. and Volkswagen AG combined last quarter, has benefited from 12% slide in the yen against the dollar this year, spurred by
Abenomics monetary-easing policies.
2. China rebound can benefit for Toyota.
Toyota sales in China, the world’s largest auto market, rose at the fastest pace in five quarters as it rebounded from last year. Toyota exports to China continue to normalize and are once again growing faster than exports to the rest of the world so that improve Toyota operational perform.
3. Strong financial position can prove invest Toyota is a wise choice.
Through the profitability margins factor, we can find that Toyota’s EBIT margin and net profit margin in recent years are better than its competitors and above the industry. Thus, we can anticipate that Toyota will have great profit ability in the next few years. Moreover, through
EBIT margin factor, we can estimate that Toyota will have great profit ability in the next few years. Owing to constant interest expense increase in recent years, the reason why Toyota’s TIE has dramatically increased recently is Toyota profit performing improvement. In addition,
Toyota’s market share is the biggest compared to its peers, and has a robust growth rate, recovering from different internal and external problems it had between 2008 and 2012. Thus, we can expect that Toyota’s stock price will perform well in the next fiscal year.
4. Relative value model shows the stock price of Toyota at 2015 fiscal year end is undervalue.
The current stock price of Toyota is $122.74 as of 12/06/13. However, based on the four competitors, which are Honda, Nissan, Volkswagen, and BMW, we find Toyota relative value stock price higher than the current market price. Through relative value model, our analysis indicates that the stock price of Toyota is below where it should be.
5. Absolute value model shows the stock price of Toyota is undervalued.
The current stock price of Toyota is $122.74 as of 12/06/13. In order to reach this price the dividend must grow at least 5.90% annually under the first k, or 4.60% under a second k.
Compared to the average annual dividend growth rate from 2003 to 2013 of 14%, if future
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growth turns out to be higher than 5.9%, the stock is worth buying. Thus, the absolute valuation model proves that Toyota’s stock is undervalued and this leads to the decision to buy shares.
2. Overview, Strategy and Recent News
2.1 Company Overview:
Toyota Motor Corporation manufactures sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. The Company also operates financing services through their subsidiaries. Automotive operations are Toyota’s most significant business segment, accounting for 90% of total revenues. Toyota’s primary markets based on vehicle unit sales for fiscal 2013 were: Japan (26%), North America (28%), Europe (9%) and Asia (19%).
Toyota has created many famous styles of cars, which benefit our daily life. There was the Corolla, Camry, Toyota trucks, the Lexus luxury brand, and Scion. According to a survey of car reliability done by Consumer Reports, Lexus and Toyota ranked first and second (Bartlett,
2013). Moreover, Toyota invented the world's first gas/electric hybrid, the Prius, which is a car built for the 21st century. Along the way, Toyota has learned a lot and enjoyed the support of
American consumers who have embraced the quality, dependability and reliability of vehicles.
Today, Toyota is the world’s largest automaker by sales, and has become one of the topselling brands in U.S. Toyota is committed to continuous improvement in everything, along with breakthrough products for the future.
2.2 Company Strategy, Vision and Philosophy:
Since its foundation, Toyota uses its Guiding principles to produce reliable vehicles and to sustainable development of society by employing innovative and high quality products and services. Toyota is taking the corporate social responsibility policy: contribution towards sustainable development. This policy can be interpreted as “Guiding Principles at Toyota” by taking into consideration the relationship with stakeholders. Moreover, Toyota’s production system is a way of “making things”, which means a “lean manufacturing system” or a “just in time system”. The objective of Toyota’s production system is to make the vehicles ordered by customers in the quickest and most efficient way so as to deliver the vehicles as quickly as
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possible. Since this production system was introduced, Toyota is becoming one of the bestselling brands in the world. What’s more, Toyota has a global vision. Toyota will lead the way to the future of mobility, enriching people’s lives worldwide in the safest and most reliable way.
Through commitment to quality, constant innovation and green peace for the planet, Toyota aims to exceed expectations to become the best vehicle seller in the world.
2.3 News for Toyota:
Big events for Toyota in last 5 years:
From November 2009 through 2010, Toyota recalled more than 9 million cars and trucks worldwide in several recall campaigns, and briefly halted production and sales (Micheline,
2010). In October 2012, Toyota announced a recall of 7.43 million vehicles worldwide to fix malfunctioning power windows switches. The move came after a series of recalls between 2009 and 2011 in which it pulled back around 10 million recalls amidst claims of faulty mechanics
(Kubota, 2012). This crisis threaten ed the company’s previous reputation of good quality cars, as well as the brand image built over time. However, owning to Toyota excellent crisis management, Toyota successfully conquer ed these recall scandal s .
In addition, the earthquake and tsunami in March 2011 can be regarded as a terrible accident for Japan. Toyota was majorly affected by the devastating Japan earthquake and tsunami in March 2011, and continues to face significant risks to its global operations. Toyota and its affiliates have three factories in the Tohoku region, a center for auto making in Japan, which suffered greatly because of the tsunami. In addition, two thirds of Toyota’s suppliers from northeastern Japan suffered terrible impact from the disaster. This impact put pressure on
Toyota’s manufacturing capacity. More seriously, the damage to Japanese sea ports hurt
Toyota’s vehicle exports as well as the supply of Japanese automotive parts to Toyota’s other international automobile manufacturing facilities (Nagy, 2011). However, since Toyota is internationalized, Toyota had more production abroad, helping Toyota bounced back faster from the supply disruption from the catastrophe.
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Abenomics:
Abenomics comes from the macro-economic policies advocated by Shinzo Abe, who is the current Prime Minister of Japan. Abe aims to expand the economy of Japan. Even though expanding the economy of Japan will still face challenges from the global economic recession,
Abe Administration provides a combination of measures such as aggressive quantitative easing from Bank of Japan, a surge in public infrastructure spending, and the devaluation of the yen. In terms of results, Japanese yen has become about 25% lower against the U.S dollar in the second quarter of 2013 compared to the same period in 2012 (Irwin, 2013). Moreover, the unemployment rate of Japan has lowered from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, which proves that the new economic plan can reduce the unemployment rate (Federal Reserve Economic Data, 2013).
Abenomics is a set of policy measures to resolve Japan’s macroeconomic issues. This policy includes monetary policy, fiscal policy and economic growth strategies to encourage private investment. Moreover, this policy set some targets, which are inflation targeting at a 2% annual rate, aggressive yen devaluation, setting negative interest rates, expansion of public investment, radical quantitative easing, and purchasing operations of bonds by Bank of Japan
(Fensom, 2012). In 2012, the National Diet passed the bill to raise the consumption tax rate to
8% in 2014 and 10% in 2015 to keep the national budget balanced (Hayashi, 2012). Even though an increasing tax rate can discourage consumption, Abenomics will bring inflation into market to spur Japanese economic development.
Abenomics Influence for Toyota
Owning to Abenomics influence, some of the results are aggressive quantitative easing, dramatic yen devaluation and setting negative interest rates. These kinds of result would benefit
Toyota a lot. The dramatic yen devaluation can spur Toyota exports to increase revenue, aggressive quantitative easing can help Toyota to expand the business, and negative interest rates can benefit Toyota to reduce the finance expense. The dramatic yen devaluation can help Toyota export so that can increase its profit. In addition, the aggressive quantitative easing is aimed at setting inflation at 2% every year and increasing labor purchasing power so that spur Japanese people consumption. Thus, this result will help Toyota to expand the business in Japan.
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Moreover, through the TIE analysis, we see that Toyota has strong solvency. Toyota strong TIE performance gives credit to reduce the finance expense.
Now, Toyota, which earned more profit than General Motors Co. and Volkswagen AG combined last quarter, has benefited from 12% slide in the yen against the dollar this year, spurred by Abenomics monetary-easing policies. Kazuyuki Terao, the Tokyo-based chief investment officer of Allianz Global Investors Japan Co, said “The weak yen triggered by
Abenomics has helped auto companies including Toyota, especially because they can fully enjoy the benefit of it.” (Horie, 2013) Through Toyota official website releasing information, Toyota
Motor sales was the No.1 retail manufacturer in November 2013.
China Rebound Influence for Toyota
Toyota sales in China, the world’s largest auto market, rose at the fastest pace in five quarters as it rebounded from last year. In 2012, the share of each market across the globe, which Toyota estimates based on the available automobile sales data in each country and region information, was 24% for China. The share of Chinese market is the highest for Toyota in the world. Even though both Japan and China conflict in their territorial confrontation over the islands called Senkakus by Japan and Diaoyu by China, Toyota exports to China continue to normalize and are once again growing faster than its exports to the rest of the world. In China, new vehicle sales increased to approximately 19.4 million units. For instance, Toyota said that its auto sales in China surged 243.9% year-on-year to about 72,406 millions in October this year and surged 48.4% year-on-year to about 74,435 millions in September this year.
3. Industry Analysis
3.1 Industry Overview
The United States has one of the largest automobile markets in the world and is home to
13 auto manufacturers (SelectUSA, 2013). Large international automakers - Toyota, Honda,
Nissan, Hyundai, Kia, Fiat (acquired Chrysler), Volkswagen, BMW all have U.S. manufacturing facilities. The industry produces vehicles and related products, such as car parts, and equally encompasses activities involving glass, steel, textiles, rubber and computer chips, among others.
Auto YTD sales totaled 14,239,897 units as of November 2013 (WSJ, 2013); Toyota totaled
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2,045,199 (14.4% of the industry). The industry is poised for a fifth straight year of growth, and is estimated to rise to 16.1 million (Trudell, 2013) next year.
The auto industry is highly capital and labor intensive and is a relatively mature industry.
3.2 Analysis of Competitive Forces – Porter’s 5 Forces
Rivalry
High: The intense competitive rivalry results from multiple factors: tit-for-tat price slashes, ad campaigns, and product developments that keep the products on the edge of innovation and profitability. Margins of the older models are getting low while the companies are developing newer models.
All major international automakers experience even more intense rivalry. State-owned car manufacturers experience less rivalry but are still under pressure from imports.
Threat of New Entrants
Low: There are big barriers to entry for new entrants. Factors like upfront capital requirements, brand equity, legislation and government policy, ability to distribute the product all contribute to the difficulties to enter.
Threat of Substitute Products
Low to medium: A buyer can look to other comparable products like bicycles, public transportation, and switch easily since most substitutes have lower costs. The younger generation cares more about the environment, so they would consume fewer cars especially when the public transportation improves stably. The threat will get more to medium if clean transportation system such as bike sharing expands to other cities in the United States.
Also, with new cars, the switching cost is high because you cannot sell a brand new car for the same price you paid for it.
Compared to its competitors, Toyota’s strengths are its lean manufacturing and efficiency and its full line of vehicle products that are suitable for every need and lifestyle. Also, the company manufactures efficiently. Toyota Miyagi factory only has 900 employees and produces
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250 cars per day. The factory shrinks costs by using side-by-side assembly line, raised platforms rather than overhead conveyor belts, and easy-to-change friction rollers. The factory started operations shortly before the Fukushima earthquake and, even though it is the Northern part of
Japan that was most affected, it resisted well and was able to resume operations just six weeks later. Therefore, we concluded that the threat of substitute products to be low to medium.
Bargaining Power of Suppliers
Medium: The bargaining power of suppliers is medium for the auto manufacturing industry because of several reasons. In the industry, the suppliers refer to parts, tires, components, electronics, and even the assembly line workers. In the US , the auto unions are tremendously powerful. But the automobile supply business is quite fragmented. Many suppliers rely on the carmakers, and may only have one carmaker as a client (Caputo, Cucchiella,
Fratocchi, Pelagagge, & Scacchia, 2004) .
Bargaining Power of Buyer Forces
High: In most cases, buyers only usually purchase one car at a time. Price sensitive customers, sometimes threaten to buy other companies’ cars, have more power on setting the price. Also, in 2009 especially, US dealers were giving great deals to buyers to get the industry moving. The US consumers are getting disenchanted with many of the products being offered by domestic automakers (McCarthy, 2007) and turn to alternatives, namely foreign cars.
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3.3 Market Share and Growth Rate Analysis
The reference industry we constructed was composed of Toyota, Honda, Ford,
Volkswagen, Hyundai, Kia, General Motors, Nissan, Fiat and BMW. We selected Honda, Ford and Volkswagen as the main competitors. According to the sales of the preceding fiscal year of each company (using two quarters’ actuals and two quarter’s estimate for March companies, and three quarters’ actuals and one quarter’s estimate for December companies), we can see that
Toyota is the biggest. Comparing with the main competitors, Toyota has a relatively stable growth rate.
Table 4.1
Market Share
Toyota
Honda
Ford
Volkswagen
Hyundai
Kia
General Motors
Nissan
Fiat
Bayerische Motoren Werke
18.8%
8.7%
10.4%
18.7%
5.9%
3.2%
11.2%
7.4%
8.3%
7.4%
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Sales Growth
Toyota has experienced the robust sales growth before the 2008-2010 Automotive industry crises, which was a part of the 2007-2008 financial crisis. Also, it recovered quickly after 2010 even though the different problems it had that led to recalls, lawsuits and settlements for litigation. The average sales growth of the last ten years was above the industry average.
Sales Growth
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
2003 -
2004
2004 -
2005
2005 -
2006
2006 -
2007
2007-
2008
2008-
2009
2009-
2010
2010-
2011
2011-
2012
2012-
2013
Avg
Annual
Growth
'03-'13
Toyota
Honda
Ford
12.58% 6.96% 10.99% 13.10% -12.01% 0.28% 9.21% 5.39% 12.84% -1.94% 5.44%
11.41% 8.77% 8.34% 10.74% -5.22% -7.19% 12.96% -3.54% 11.65% 7.48% 5.28%
4.54% 3.06% -9.51% 7.86% -15.22% -19.13% 8.91% 5.70% -1.48% 7.93% -1.24%
Volkswagen 8.71% 5.64% 12.75% 13.23% 11.72% -12.17% 14.79% 31.99% 11.68% 4.86% 9.83%
Industry Avg 9.62% 5.58% 6.13% 7.83% -6.76% -13.44% 12.66% 15.95% 8.04% 2.68% 4.47%
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Net Income Growth
Toyota’s net income growth rate demonstrated major growth from its 2003 to its 2007 as well as its declines in 2008, 2009 and 2011. The company recovered well after 2011, pulling its
10-year average annual growth rate to 6.34%, which is well below the industry and above only
Honda. But the average annual net income growth rate of 2009 to 2013 is 53.94%, which well outweighs all of its peers.
Net Income Growth
800.00%
600.00%
400.00%
200.00%
0.00%
-200.00%
-400.00%
-600.00%
-800.00%
-1000.00%
Toyota
Honda
2003 -
2004
5.78%
2004 -
2005
10.08% 16.61%
2005 -
2006
10.50% 16.82%
-3.95%
2006 -
2007
3.63%
2007-
2008
2008-
2009
2009-
2010
2010-
2011
2011-
2012
2012-
2013
7.66% -128.66% -152.08% 112.35% -25.17% 222.48% 64.53%
-74.05% 112.17% 115.79% -57.06% 65.35% 36.01%
Avg
Annual
Growth
'03-'13
6.34%
3.90%
Ford 294.57% -54.76% -868.19% -78.11% 431.15% -118.47% 141.92% 208.08% -71.97% -2.12% 19.66%
Volkswagen -30.43% 51.49% 88.05% 129.93% 23.32% -80.81% 577.58% 136.93% 30.17% -56.69% 25.59%
Industry Avg 16.11% -27.86% -24.52% -144.05% 456.53% -390.80% -59.00% 66.35% -2.66% -8.28% 10.63%
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Cash Flow from Operations
In the first Cash Flow Operation Growth Rate chart below, Ford had very unusual number because its cash flow from operations was unusually negative in 2008, so we decided to construct a second chart without Ford.
Cash Flow Operation Growth Rate
2000.00%
0.00%
-2000.00%
-4000.00%
-6000.00%
-8000.00%
-10000.00%
Toyota
Honda
2003 -
2004
2004 -
2005
2005 -
2006
2006 -
2007
2007-
2008
2008-
2009
2009-
2010
2010-
2011
2011-
2012
8.99% 0.07% 25.51% -5.13% -44.19% 88.19% -13.80% -22.70% 60.40%
16.20% -26.15% 50.82% 27.44% -61.32% 335.94% -24.80% -25.31% 3.42%
Avg
Annual
Growth
'03-'13
4.28%
5.48%
Ford 11.86% -9.76% -52.80% 30.27% -101.43% -9062.01% -28.46% -14.75% -7.55% -8.54%
Volkswagen 44.48% -6.54% 36.54% 18.04% -26.29% 12.11% -14.44% -22.01% -21.67% -0.69%
Industry Avg 16.23% -25.17% 12.77% 41.63% -60.26% 135.73% 3.32% -19.98% 7.48% 1.63%
Cash Flow Operation Growth Rate
400.00%
350.00%
300.00%
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
-50.00%
-100.00%
2003 -
2004
2004 -
2005
2005 -
2006
2006 -
2007
2007-
2008
2008-
2009
2009-
2010
2010-
2011
2011-
2012
Avg
Annual
Growth
'03-'13
4.28% Toyota 8.99% 0.07% 25.51% -5.13% -44.19% 88.19% -13.80% -22.70% 60.40%
Honda 16.20% -26.15% 50.82% 27.44% -61.32% 335.94% -24.80% -25.31% 3.42% 5.48%
Volkswagen 44.48% -6.54% 36.54% 18.04% -26.29% 12.11% -14.44% -22.01% -21.67% -0.69%
Industry Avg 17.63% -29.87% 38.51% 43.14% -55.25% 100.00% 8.85% -20.58% 9.33% 3.67%
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From the second chart, with Ford excluded, we can see that Toyota’s cash flow mostly grows along the industry average, with an average annual growth better than the industry average. It also had an average annual cash flow from operations growth rate of 2.34% for 2007 to 2012, when most of its peers experienced a drop in the 5 years.
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4. Fundamental Analysis
Profitability Margins
EBIT Margin
EBIT Margin measures the operating profitability of a company. Toyota experienced a big drop in 2008, and recovered well to return to the leader of the industry in 2012 and YTD
2013.
EBIT Margin
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
2003
Toyota
Honda
Ford
9.0%
7.4%
1.1%
Volkswagen -0.1%
Industry Avg 4.9%
2004
8.8%
7.3%
2.8%
0.3%
4.7%
2005
8.9%
7.4%
3.9%
0.7%
4.3%
2006
9.3%
7.7%
-5.1%
1.0%
3.2%
2007
8.9%
7.9%
4.5%
3.4%
4.8%
2008
-3.7%
1.9%
-4.2%
2.9%
-0.2%
2009
2.2%
4.2%
3.7%
-1.2%
0.6%
2010
1.2%
6.4%
10.1%
3.6%
5.7%
2011
1.8%
2.9%
8.6%
5.9%
6.3%
2012
6.5%
3.4%
5.1%
5.3%
6.2%
YTD
2013
8.6%
3.9%
4.1%
4.6%
6.0%
Net Profit Margin
Toyota’s net profit margin was another margin that convinced us that the company held the potential to resist the adverse situation and become the leader again. It was the highest before the automotive industry crisis of 2008, and dropped to the industry average. It went up steadily after, becoming the highest again recently. The two big recalls happened in 2009/10 and
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2012, affecting mostly the growth in 2010 and 2013. But they did not obstruct what Toyota had achieved to grow.
Net Profit Margin
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
YTD
2013
Toyota
Honda
Ford
6.72% 6.31% 6.52% 6.86% 6.53% -2.13% 1.11% 2.15% 1.53% 4.36% 5.80%
5.69% 5.62% 6.03% 5.34% 5.00% 1.37% 3.13% 5.98% 2.66% 3.94% 3.83%
0.56% 2.12% 0.93% -7.89% -1.60% -10.03% 2.29% 5.09% 14.83% 4.22% 3.91%
Volkswagen 1.22% 0.78% 1.12% 1.86% 3.78% 4.18% 0.91% 5.39% 9.67% 11.27% 4.31%
Industry Avg 3.17% 3.01% 2.91% 1.78% 0.46% -2.61% 11.42% 4.83% 6.55% 5.68% 4.60%
ROE
After excluding Ford and adding Nissan in the chart, Toyota is seen as performing below the industry average since 2008. However, we can see that it has outperformed the three competitors – Volkswagen, Honda, and Nissan. Also, the ROE trend is just like that of other ratios that we saw in the previous charts, steadily recovering.
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ROE
400.00%
300.00%
200.00%
100.00%
0.00%
-100.00%
-200.00%
-300.00%
Toyota
Honda
Ford
2003 2004 2005 2006 2007
14.60% 13.39% 13.87% 14.86% 13.83% -3.94% 2.13% 4.09% 2.85% 9.02% 10.76%
16.87% 15.78% 16.10% 13.76% 13.29% 3.20% 6.44% 12.17% 4.78% 7.78% 8.02%
10.68% 26.24% 11.15% -253.16% -255.57%
2008 2009 2010 2011 2012
YTD
2013
-21.58% -154.50% 281.62% 36.58% 29.07%
Volkswagen 4.46% 2.94% 4.54% 7.74% 14.02% 14.21% 2.73% 16.82% 29.77% 32.16% 10.48%
Industry Avg 9.89% 9.89% 7.74% -22.71% -17.77% 3.19% 5.18% 14.82% 43.95% 18.04% 13.18%
ROE
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
Toyota
Honda
2003 2004 2005 2006 2007
14.60% 13.39% 13.87% 14.86% 13.83%
16.87% 15.78% 16.10% 13.76% 13.29%
2008
-3.94%
3.20%
2009
2.13%
6.44%
2010
4.09%
12.17%
2011
2.85%
4.78%
2012
9.02%
7.78%
YTD
2013
10.76%
8.02%
Nissan 26.285% 22.820% 18.656% 13.888% 13.672% -7.620% 1.588% 11.293% 11.207% 9.948% 9.816%
Volkswagen 4.46% 2.94% 4.54% 7.74% 14.02% 14.21% 2.73% 16.82% 29.77% 32.16% 10.48%
Industry Avg 10.52% 8.07% 7.36% 2.89% 11.96% 3.19% 5.18% 14.82% 17.54% 15.98% 11.19%
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ROA
Return on Assets measures how efficient management is using its assets to generate sales.
The company experienced a big drop in 2008 and after, but has been recovered well and increased to be the leader again in 2013.
ROA
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
Toyota
Honda
2003
5.34%
5.80%
2004
4.97%
5.51%
2005
5.13%
5.99%
2006
5.43%
5.23%
2007
5.04%
4.87%
2008
-1.40%
1.12%
2009
0.73%
2.29%
2010
1.41%
4.60%
2011
0.98%
1.81%
2012
3.10%
2.89%
YTD
2013
3.80%
3.05%
Ford 0.30% 1.17% 0.57% -4.46% -0.97% -5.90% 1.31% 3.65% 11.78% 3.07% 2.96%
Volkswagen 0.96% 0.56% 0.81% 1.45% 2.92% 3.03% 0.56% 3.63% 6.80% 7.71% 2.65%
Industry Avg 3.02% 2.66% 2.79% 1.64% -0.17% -2.75% 10.37% 4.00% 5.65% 4.80% 3.28%
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Short Term Solvency
Current Ratio
Current Ratio measures the company’s ability to pay back its short-term liabilities with its short-term assets. The higher the ratio, the more capable the company is of paying its obligations on demand.
Toyota’s current ratio was above the industry before 2007, and was below after. But the almost flat line above 1 tells us that the company had a relatively stable ability to pay back its short-term liabilities with its short-term assets.
Current Ratio
3.000
2.500
2.000
1.500
1.000
0.500
0.000
2003
Toyota
Honda
1.165
1.095
Ford 1.286
Volkswagen 1.034
Industry Avg 1.096
2004
1.147
1.069
1.156
1.138
1.006
2005 2006
1.070
1.001
1.310
1.225
1.232
0.701
1.085
1.145
1.030
0.999
2007
1.012
1.118
2.329
1.222
1.139
2008 2009
1.067
1.223
1.091
1.349
2.143
2.617
1.175
1.119
1.106
1.309
2010
1.096
1.314
2.433
1.118
1.324
2011 2012
1.046
1.068
1.324
1.299
2.387
2.336
1.043
1.072
1.330
1.373
YTD
2013
1.090
1.263
2.480
1.069
1.477
19
Quick Ratio 2
Quick Ratio 2 measures how well a firm can meet its short-term obligations with its most liquid short-term assets. Toyota is relatively weak in the industry. But considering that it has a growing ROE and a stable growth of cash flow from operations, we do not think that it is risker than its peers.
Quick Ratio 2
3.000
2.500
2.000
1.500
1.000
0.500
0.000
2003
Toyota
Honda
0.895
0.708
Ford 1.112
Volkswagen 0.769
Industry Avg 0.782
2004
0.870
0.693
0.971
0.880
0.717
2005
0.813
0.833
1.054
0.815
0.716
2006
0.757
0.799
0.531
0.880
0.662
2007
0.768
0.730
2.191
0.939
0.814
2008
0.812
0.644
2.017
0.823
0.765
2009
0.983
0.908
2.509
0.870
1.009
2010
0.871
0.897
2.312
0.888
1.052
2011
0.803
0.878
2.270
0.771
1.025
2012
0.836
0.844
2.199
0.800
1.048
YTD
2013
0.846
0.822
2.264
0.813
1.140
20
Operating Efficiency
Receivables Turnover
Toyota’s ability to collect its accounts receivable is relatively weak, below the industry average. Its receivables turnover remains relatively constant.
Receivables Turnover
9.000
8.000
7.000
6.000
5.000
4.000
3.000
2.000
1.000
0.000
2003 2004
Toyota
Honda
3.141
3.800
5.134
5.014
Ford 1.963
2.062
Volkswagen 3.492
3.218
Industry Avg 5.705
6.078
2005 2006
3.804
3.898
4.946
4.742
2.253
4.088
3.132
3.362
6.624
7.763
2007 2008
3.735
3.250
4.956
4.562
2.844
1.350
3.239
2.996
6.798
6.101
2009 2010 2011
3.257
3.195
3.139
4.279
4.580
4.169
1.286
1.591
1.747
2.742
3.177
3.369
5.570
5.276
5.714
2012
YTD
2013
3.344
3.276
4.498
6.649
1.669
1.782
3.610
3.211
6.224
4.742
21
Asset Turnover
Asset Turnover measures a firm’s efficiency at using its assets in generating sales or revenue. Toyota’s asset turnover was close along the industry average from 2003 to 2006. After
2006, it has been dropped and maintained relatively stable between 0.65 and 0.71.
Asset Turnover
1.200
1.000
0.800
0.600
0.400
0.200
0.000
2003
Toyota 0.795
Honda 1.020
Ford 0.537
Volkswagen 0.789
Industry Avg 0.815
2004
0.788
0.980
0.553
0.721
0.809
2005
0.786
0.993
0.609
0.721
0.810
2006
0.791
0.978
0.565
0.778
0.823
2007
0.772
0.974
0.606
0.772
0.874
2008
0.659
0.819
0.588
0.727
0.817
2009
0.663
0.732
0.573
0.610
0.727
2010
0.654
0.770
0.717
0.674
0.777
2011
0.645
0.681
0.794
0.703
0.840
2012
0.710
0.733
0.728
0.684
0.857
YTD
2013
0.658
0.796
0.759
0.614
0.764
22
Inventory Turnover
Inventory Turnover measures how often a company’s inventory is sold during a period of time. Annually, Toyota has a better inventory turnover than most of its peers and the industry level.
Inventory Turnover
20.000
18.000
16.000
14.000
12.000
10.000
8.000
6.000
4.000
2.000
0.000
Toyota
Honda
2003
12.502
2004
12.208
7.394
7.419
2005
11.487
7.384
2006
11.368
7.088
2007
11.279
7.172
2008
11.284
6.074
2009
11.848
5.883
2010
12.832
7.071
2011
11.753
6.112
2012
11.780
6.225
YTD
2013
10.573
6.780
Ford 17.935
14.130
14.335
14.487
13.461
12.841
13.506
17.481
18.236
16.529
14.866
Volkswagen 6.758
6.467
6.537
7.031
6.728
5.834
5.496
6.740
5.849
5.664
5.326
Industry Avg 9.190
8.554
8.279
8.135
7.913
7.270
7.229
8.671
9.148
8.923
8.316
23
Long Term Solvency
Long-Term Debt-to-Equity Ratio
Long-Term Debt-to-Equity Ratio indicates that what proportion of equity and long-term debt the company is using to finance its assets in a debt-per-dollar-of-equity ratio. After excluding Ford from the first chart below because of 2009 and 2010, we can see Toyota is not very aggressive in financing its growth with debt, while the industry fluctuated in the last ten years.
24
Long-Term Debt-to-Equity Ratio
300.0%
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%
-50.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
YTD
2013
51.9% 55.4% 53.4% 52.9% 50.4% 62.6% 67.7% 62.4% 57.3% 60.4% 60.8% Toyota
Honda 48.5% 47.4% 45.5% 42.5% 40.4% 48.2% 53.4% 45.9% 50.8% 53.8% 55.2%
Volkswagen 106.2% 143.0% 131.4% 106.8% 92.0% 95.0% 104.9% 80.8% 77.2% 82.1% 73.1%
Industry Avg 157.1% 172.8% 256.1% -14.8% 55.8% 80.6% 94.2% 72.8% 84.2% 84.5% 124.6%
25
TIE
Times Interest Earned is a measure of a company’s ability to honor its debt payments.
Comparing with its peers and the industry, Toyota is better able to cover its interest payments.
The recent soaring number resulted from multiple factors to generate great earning s – the QE of
Japan, the recovery of the auto industry and Toyota’s reputation, the rebound of China market as well as the relatively stable annual interest expense.
TIE
120.00
100.00
80.00
60.00
40.00
20.00
0.00
(20.00)
(40.00)
2003 2004
Toyota
Honda
Ford
75.33
85.72
58.87
54.13
1.31
Volkswagen (0.07)
3.96
0.36
Industry Avg 18.78
19.72
2005 2006
86.96
45.39
61.41
65.98
0.82
(0.93)
0.75
1.21
19.90
15.05
2007 2008 2009 2010 2011
50.71
(16.31) 12.36
57.34
0.71
8.41
(0.58)
3.54
3.28
15.73
(0.51)
28.98
0.63
(1.12)
5.59
7.98
67.24
2.03
3.93
14.43
14.83
22.29
2.50
8.26
14.31
2012
YTD
2013
62.45
102.36
26.38
33.81
9.60
9.50
7.26
4.07
21.40
14.35
Summary of the Ratio Analysis
Toyota’s market share is the biggest compared to its peers, and has a robust growth rate, recovering from different internal and external problems it had between 2008 and 2012. Toyota is relatively weak in terms of short term liquidity, though the trend is stable and we think that it is not risker than others. It is not very aggressive in financing its growth with debt, which also means less risk, and is better able to pay its debt payments. It has a historically healthy profitability and a trend to grow better, despite its difficult four years.
26
5. Pro Forma Income Statement -- EPS Forecast
Method
We created a pro forma Statement to estimate the EPS of Toyota for March 2015. Our custom industry was created to estimate the sales of Toyota for March 2015. The sales-related cost items were calculated by multiplying our estimated percentage of sales to estimated sales.
The formula we used here is “EPS = Net Income available to common / Weighted Average
Diluted Shares Outstanding.”
Custom industry
The industry is a combination of ten companies, including TM. The automotive market is worldwide and highly competitive. TM faces intense competition from automotive manufacturers in the markets in which it operates. Toyota sells its vehicles in approximately 170 countries and regions. Toyota’s primary markets for its automobiles are Japan, North America,
Europe and Asia. Thus we chose Japanese companies, US companies, EU companies and Asian companies to create our custom industry. The following table sets forth our custom industry by geographical markets.
Company
Toyota Motor Corp
Honda Motor Co., Ltd.
Nissan Motor Co., Ltd.
Volkswagen AG
Bayerische Motoren Werke AG
Fiat S.p.A.
Ford Motor Company
General Motors Company
Hyundai Motor Company
KIA Motors Corporation
Countries & Regions
Japan
EU
EU
US
Japan
Japan
EU
US
Asia
Asia
27
Forecast Sales/Revenue for March 2015
We collected sales data of those companies from 2004 to 2013, fiscal year. Because
Japanese companies fiscal year end on March, we combined quarterly actuals with one
(December firms) or two (March fiscal firms) estimates of quarters to come to fill out the 2013 year. The following table shows the sales and market share. The Source is FactSet
Fundamentals. All figures in billions of U.S. Dollar, except for percent items.
GM
Nissan
Fiat
BMW
Fiscal
2004
Fiscal
2005
Fiscal
2006
Fiscal
2007
Fiscal
2008
Fiscal
2009
Fiscal
2010
Fiscal
2011
Fiscal
2012
Fiscal
2013
M-S March
2013 2015
Toyota
153.7
5 173.09 185.12 205.47 232.40 204.47 205.05 223.94 236.01 266.31 126.55 273.90
market share of TM
17.15
% 17.61% 17.84% 18.66% 19.57% 18.47% 21.40% 20.74% 18.86% 19.69% 18.50% 18.70%
Honda
Ford
Volkswa gen
Hyundai
KIA
72.24 80.47
164.2
0 171.65
87.53 94.83 105.02 99.54
176.90 160.07 172.65 146.37
92.38 104.36 100.66 112.39
118.37 128.92 136.27 134.25
57.93 125.76
74.07 144.47
101.6
6 110.52
39.10 46.37
116.76
57.44
131.64 149.06
66.67 74.91
166.53
72.42
146.26 167.89
71.67 57.93
221.59
70.22
247.49 130.27
74.98 39.42
279.86
88.93
22.53 47.41 12.68 15.50
185.5
2 193.52
20.08 20.76 21.86 20.18
194.66 205.60 179.98 148.98
23.07 30.98 38.99 41.93
104.59 135.59 150.28 152.26 78.06 164.63
Industry
65.75
54.64
46.93
79.79
56.70
55.08
83.30
57.81
57.95
89.54
65.06
61.50
94.71
80.12
76.68
83.88
86.89
77.84
80.95 102.44
45.45
70.47
47.48
80.03
119.16 116.15
82.83
95.71
107.84
98.71
48.13
56.60
50.36
105.61
124.41
109.71
896.4
6 982.69 1037.55 1101.14 1187.39 1107.10 958.25 1079.55 1251.72 1352.30 683.92 1464.69
The market share of Toyota in 2008 increased by 2.42% during 5 years compared with
2004. There was an increase trend in that period. However, the market share became very volatile during 2009 to 2012 because of all the unusual events. Since Toyota has already moved beyond the impact of the Great East Japan Earthquake and the flood in Thailand, we think the market share will increase. The market share for the latest two quarters is 18.50%. Thus 18.70% would be a rational estimate number for the March 2015 market share.
28
The estimated sales for March 2015 of all the other companies are FactSet estimated data.
We calculate the forecast sales of the custom industry by divided the sum of all the other companies’ sales by our estimated market share of Toyota. As the table above showed, our forecast revenue of Toyota for March 2015 would be 273.90
billion dollars.
Forecast COGS
Cost of Goods Sold excluding Depreciation & Amortization is a sales-related item. We collected the COGS for the same period. The following table shows the sales, COGS and the relationship between them. The Source is FactSet Fundamentals. All figures in millions of U.S.
Dollar, except for percent items.
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
M-S
March
Time
2008
2009
2010
2011
2004
2005
2006
2007
2012
2013
2013
2015
Sales/Revenue
153050.89
172589.78
185855.76
204840.90
230023.80
204114.27
204066.94
221791.82
235350.83
266131.42
126831.76
273897.90
COGS excluding
D&A
111535.12
128006.61
137737.82
152644.71
175250.29
168630.26
164421.35
180292.05
194027.92
211512.40
96371.30
206331.01
COGS excluding
D&A as % of Rev
72.87%
74.17%
74.11%
74.52%
76.19%
82.62%
80.57%
81.29%
82.44%
79.48%
75.98%
75.33%
The percentage of COGS to Revenue increased smoothly during the 2004-2008 period.
Then it jumped to 80% during the 2009-2012 because the costs of recall and product quality related expenses and the costs related to the Great East Japan Earthquake are counted in COGS.
Toyota identifies the factors changed the COGS are effect of changes in vehicle units sales and sales mix, effect of fluctuation in exchange rates and effect of cost reduction efforts.
29
The fluctuation in exchange rates had favor impact on COGS in 2011 and 2012. The numbers are $5474.86 million in 2012 and $9277.67 million in 2011. However it became unfavorable impact in 2013. Since we do not expect exchange rate of yen will significantly increase in the next two years, the unfavorable impact of exchange rates will last to March 2015.
The amount of effect of cost reduction efforts includes the impact of fluctuation in the price of steel, precious metals, non-ferrous alloys including aluminum, plastic parts and other production materials and parts. Toyota’s continued cost reduction efforts reduced COGS by
$5428.12 million, $1899.68 million and $2182.70 million respectively in 2013, 2012 and 2011.
Although the number decreased in 2012, it offset the effects from raw materials price increase.
The costs of vehicle unit sales and sales mix have increased since 2010. During fiscal
2013 and 2012, Toyota’s consolidated vehicle unit sales in Japan increased as compared with each prior fiscal year, primarily as a result of the active introduction of new products and the efforts of dealers nationwide. During fiscal 2013, total overseas vehicle unit sales increased in every region. We expect the costs of vehicle unit sales and sales mix will go back to the normal level before the 2008 crisis.
The COGS accounts for averagely 75.33% of revenue between 2004 and Sep 2013, excluding 2009-2012. Since the latest data is 75.98%, 75.33% would be a rational estimate for
March 2015. Then we calculated our estimate COGS as $206,331.01 million.
Forecast Depreciation & Amortization expense
Depreciation & Amortization expense is not a sales-related item. As Toyota said, depreciation of property, plant and equipment is mainly computed on the declining-balance method for the parent company and Japanese subsidiaries and on the straight-line method for foreign subsidiary companies at rates based on estimated useful life of the respective assets according to general class, type of construction and use. The estimated useful life ranges from 2 to 65 years for buildings and from 2 to 20 years for machinery and equipment. We think D&A is related to property, plant & equipment. We collected the D&A and PP&E for the same period.
The following table sets forth the D&A, PP&E and the relationship between them. The Source is
FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items.
30
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
M-S
March
Time
2008
2009
2010
2011
2004
2005
2006
2007
2012
2013
2013
2015
Depreciation &
Amortization
Expense
8583.22
9281.99
10700.45
11826.07
13047.03
14865.66
15232.29
13727.32
13523.43
13329.48
12045.42
13400.00
Property, Plant &
Equipment - Gross
128439.94
131441.93
134399.90
148392.58
174775.06
174070.47
182938.23
200426.52
204742.48
193827.10
191721.09
200000.00
D&A as % of
PP&E
6.68%
7.06%
7.96%
7.97%
7.47%
8.54%
8.33%
6.85%
6.61%
6.88%
6.28%
6.70%
The gross property, plant & equipment kept growing during 2004 to 2008. It was slightly reduced in 2009 mainly due to the 2008 crisis. Recently depreciation decreased as a result of a reduction of Toyota’s capital expenditures after the Lehman financial crisis. Although recently the gross property, plant &equipment have a decreasing trend, it will grow as Toyota executes its globalization strategy. The total capital expenditures for property, plant & equipment were increased 18.1% during fiscal 2013. And Toyota expects the investments in property, plant and equipment will keep increasing during fiscal 2014. Thus we assume the gross property, plant & equipment will be $200 billion for the March 2015 fiscal year. Dividing D&A expense by PP&E gave us an average percentage near 6.70% in the last three years. We decided to use that into
March, 2015. Therefore, we calculated our estimate D&A expense on March 2015 as 13,400.00 million dollars.
31
Forecast Research & Development expense
Research & development expense is a sales-related item because Toyota funds its development activities through cash generated by operations. The following table shows the sales, R&D and the relationship between them. The Source is FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items.
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
M-S
March
Time
2008
2009
2010
2011
2012
2013
2004
2005
2006
2007
2013
2015
Sales/Revenue
153050.89
172589.78
185855.76
204840.90
230023.80
204114.27
204066.94
221791.82
235350.83
266131.42
126831.76
273897.90
Research &
Development
6037.86
7025.33
7179.54
7619.34
7110.45
8988.72
7810.62
8528.28
9875.78
9739.26
4826.03
10134.22
R&D as % of
Revenue
3.95%
4.07%
3.86%
3.72%
3.09%
4.40%
3.83%
3.85%
4.20%
3.66%
3.81%
3.70%
As Toyota 20-F annual report announced, the R&D expense increased $240 million in
2013. The numbers in 2012 and 2011 are $633 million and $303 million. After 2008 financial crisis, Toyota planned to reduce costs by sharing research and development expenses for environmental and other technology. Thus the R&D expense will not significantly increase in less than two years. The R&D expense accounts for 3.7% of revenue on average between 2004 and September 2013, excluding 2009-2012. We estimated the proportion will be 3.7% for March
2015. Then the estimate R&D expense was calculated as 10,134.22 million dollars.
32
Forecast other SG&A expense
The following table shows the sales, other SG&A expense and the proportion between them. The Source is FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items.
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
M-S
March
Time
2008
2009
2010
2011
2012
2004
2005
2006
2007
2013
2013
2015
Sales
153050.89
172589.78
185855.76
204840.90
230023.80
204114.27
204066.94
221791.82
235350.83
266131.42
126831.76
273897.90
Other SG&A
12143.46
12719.05
12377.26
13602.12
14750.86
16213.22
15014.19
13776.02
13419.91
15618.14
6906.50
15886.08
Other SG&A as
% of Revenue
7.93%
7.37%
6.66%
6.64%
6.41%
7.94%
7.36%
6.21%
5.70%
5.87%
5.45%
5.80%
The selling, general and administrative expenses excluding R&D started to decrease from
2009. The reasons are favorable impact of fluctuations in foreign currency translation rates and decrease of the financial services operations. The increase in 2013 due mainly to the ¥90.0 billion charge for costs related to the settlement of the economic loss claims in the consolidated federal action in the U.S. We do not think the settlement will recur annually. Thus we expect the other SG&A expense will not grow significantly in less than two years. The estimate other
SG&A accounts for 5.8% of revenue on March. Then the estimate other SG&A was calculated as 15,886.08 million dollars.
33
Forecast interest income
Investments will produce interest income. The non-operating interest income is related to cash & short-term investments and non-operating long-term investments. The interest yield is calculated by the interest income in this year and the amount of investments in the prior year.
The following table shows the cash & short-term investments, other long-term investments, nonoperating interest income and the interest yield. The Source is FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items.
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Estimate
March
Time
2008
2009
2010
2011
2012
2013
2014
2015
2004
2005
2006
2007
Cash & ST
Investments
21595.67
19544.56
19108.53
20008.90
23163.01
30219.54
43360.82
42350.61
35732.08
34786.86
44892.48
273897.90
Other Long-Term
Investments
21550.16
25281.81
28837.38
32435.76
34452.58
21290.62
24146.82
43088.65
49256.60
55058.32
70997.15
15886.08
Nonoperating
Interest Income
Interest
Yield
492.29
628.15 1.46%
830.20
1128.55
1.85%
2.35%
1449.62
1376.70
842.33
1059.95
1264.73
1190.16
2.76%
2.39%
1.64%
1.57%
1.48%
1.40%
1.40%
1622.45
The risk-free interest rate is pretty low recently in both U.S. and Japan, and we expect the interest rate will stay low until March 2015. Thus we do not think the interest yield will increase and estimate it will be 1.4% on March 2014. Cash & ST investments and other LT investments increase smoothly in last two quarters. We use those semiannual growth rates to estimate them on March 2014. The estimate cash & ST investments is 44,892.48 million dollars and the estimate other LT investments is 70,997.15 million dollars. We calculate estimate interest income by multiplying the interest yield on March 2014 and the sum of cash & ST investments
34
and other LT investments on March 2014. Then the estimate interest income on March 2015 is
1,622.45 million dollars.
Forecast interest expense
It is hard to figure out the coupon rate of unsecured loans for Toyota. Instead, we find the estimated amount of interest expense on long-term debt for 1 to 3 years in 20-F form 2013 annual report was 299,299 million yen. The table in annual report is attached below. To estimate annual interest expense, we divided the total expense by three. The FactSet exchange rate is
¥94.02 = $1.00. The estimate interest expense is 1061.12 million dollars.
The biggest historical interest expense in last ten years is 466.12 million dollars. Thus we think our estimate interest expense is overrated.
Forecast income tax
The following table set forth the EBT, income taxes and realized tax rates. The Source is
FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items. We anticipate the tax rate will slightly increase. The realized tax rate on March 2015 will be 40% and income taxes will be 11,523.30 million dollars.
35
Fiscal
Fiscal
Fiscal
Fiscal
March
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Time
2010
2011
2012
2013
2015
2004
2005
2006
2007
2008
2009
EBT
15626.48
16323.86
18441.30
20378.94
21325.04
-5571.56
3138.57
6577.61
5482.08
16930.38
28808.26
Income Taxes
6029.24
6120.71
7024.98
7683.75
7975.34
-561.17
997.82
3652.85
3321.52
6654.26
11523.30
Realized Tax
Rates:
31.79%
55.53%
60.59%
39.30%
40.00%
38.58%
37.50%
38.09%
37.70%
37.40%
10.07%
Forecast equity in earnings of affiliates and minority interest expense
The performances of affiliates are related to the performance of Toyota Company.
Therefore, the equity in earnings of affiliates and minority interest expense are related to EAT.
The following table shows EAT, equity in earnings of affiliates and the proportion between them. The Source is FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items. The proportion smoothly increased from 2004 to 2008. It became instable from 2009 and recently it has a decreasing trend. We expect it will keep decrease, but it will not go back to 12% level in less than two years. Our estimate proportion is 16.9% and equity in earnings of affiliates is 2,921.16 million dollars on March 2015.
Fiscal
Fiscal
Fiscal
Fiscal
Time
2004
2005
2006
2007
EAT
9597.24
10203.14
11416.32
12695.19
Equity in Earnings of Affiliates
EEA as % of
EAT
1064.56
1297.54
1452.13
1792.09
11.09%
12.72%
12.72%
14.12%
36
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
M-S
March
2012
2013
2014
2015
2008
2009
2010
2011
13349.70
-5010.39
2140.75
2924.76
2160.56
10276.11
9172.64
17284.96
2363.43
424.78
488.96
2510.77
2503.76
2792.51
1607.04
2921.16
17.70%
-8.48%
22.84%
85.85%
115.89%
27.17%
17.52%
16.90%
The following table shows EAT, Minority interest expense and proportion between them.
The Source is FactSet Fundamentals. All figures in millions of U.S. Dollar, except for percent items. The historical proportions before 2009 are near 5%. During the latest two years the proportion began to decrease. We think the proportion will keep decreasing but will not go back to 5% level in less than two years. Thus the estimate proportion is 8% and the minority interest expense is 1,382.80 million dollars on March 2015.
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
M-S
March
Time
2008
2009
2010
2011
2004
2005
2006
2007
2012
2013
2014
2015
EAT
9597.24
10203.14
11416.32
12695.19
13349.70
-5010.39
2140.75
2924.76
2160.56
10276.11
9172.64
17284.96
Minority Interest
Expense
MIE as % of
EAT
377.75
604.14
745.59
425.00
682.15
-241.38
374.26
669.12
1073.22
1463.31
652.99
1382.80
3.94%
5.92%
6.53%
3.35%
5.11%
4.82%
17.48%
22.88%
49.67%
14.24%
7.12%
8.00%
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Income statement
Sales/Revenue
COGS excluding D&A
Depreciation & Amortization Expense
Gross Income
Research & Development
Other SG&A
EBIT (Operating Income)
Nonoperating Interest Income
Interest Expense other income(expense)
EBT
Income Taxes
EAT
Equity in Earnings of Affiliates
Minority Interest Expense
Net Income
Net Income available to Common
Diluted Shares Outstanding
EPS
Forecast EPS
The following table sets forth the summary of our estimate EPS for March 2015. All figures in millions of U.S. Dollar, except for per share items. We assume the other income
(expense) to be 100 million because this item is always positive and last year’s data is 85 million.
Toyota does not have any repurchase program now, so we assume the diluted shares outstanding will remain the same. Therefore, our forecast EPS is $11.87.
march
2015
1060.78
100.00
28808.26
11523.30
17284.96
2921.16
1382.80
18823.32
273897.90
206331.01
13400.00
54166.88
10134.22
15886.08
28146.58
1622.45
18823.32
1585.49
11.87
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6. Relative valuation Model
The relative valuation method is one of the ways to determine asset value. In our relative valuation model, we estimate Toyota’s stock based on three factors. The first one is Toyota’s forward EPS at 2015 fiscal year end. The second one is competitors’ forward P/E at 2015 fiscal year end. The last one is adjustment factor. We multiply these three factors to use relative valuation method to estimate Toyota’s stock price. Firstly, we estimate Toyota’s EPS based on income statement. Through estimate the net income and diluted share outstanding, we can forecast the EPS for Toyota at 2015 fiscal year end. Next, for December fiscal-year comparable firms, we take a weighted average of the December 2014 forward and December 2015 forward
P/E so that the weightings create the March 2015 fiscal year. In addition, we use the FaceSet estimate page to get the competitors’ forward P/E which fiscal year-end locates at March. Lastly, we use the Toyota’s ten years P/E to divide the competitors’ ten years P/E. We analyze those relationships to arrive at the adjustment factors. Owing to these three factors, we can use the relative valuation method to get the estimate current price for the Toyota. Compare with the estimate current price and current price, we can make a decision whether invest Toyota.
6.1 Adjustment factors
We used the same competitors as we did before. However, several companies do not have historical P/E on March for some years. Thus we use two ways to collect data. The first one is all
LTM on March. The second one is LTM on December from 2003 to 2008 and LTM on March for the rest of the years. We use the first method to estimate adjustment factors for the Japanese companies and use the second method to estimate the other companies. Unfortunately, some data for Fiat, Ford, Hyundai and KIA are still missing, which may impact the reliability of the adjustment factors.
The following table shows the statistical results of the first method. The historical relative proportion between Honda and Toyota is at the bottom of all years’. Thus, we think the adjustment factor for Honda should be below the averages 1.3 should be a rational adjustment factor. The two averages of Nissan are pretty close. The small difference shows a decreasing trend. Therefore our adjustment factor of Nissan is 1.6.
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company
Volkswagen
BMW
Fiat
Ford
Hyundai
KIA
Industry company
Honda
Nissan
Period
2003-Sep 2013
2003-2013
2003-Sep 2013
2003-2013
Average
1.3562
1.4181
Median
1.1412
1.1523
1.6102
1.6350
1.3621
1.3512
The following table shows the statistical results of the second method. When calculating the average and median, the data of 2011 and 2012 are excluded. The reason is that the proportions of those two years are unusual. The adjustment factors of Volkswagen and BMW are
1.2 and 1.25, respectively. Since the other companies missed some data, it is hard to decide their adjustment factors. Base on the data we collected, the adjustment factors of Fiat, Ford, Hyundai and KIA are 2, 2.2, 1.4 and 1.4, respectively. The adjustment factor of Industry is 1.1. period
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Dec 2003-Sep 2013
Dec 2003-Mar 2013
Average
1.3727
1.3994
Median
0.8713
0.8348
1.2208
1.2216
1.2142
1.2758
1.6397
1.9128
2.5766
2.8690
1.3717
1.3447
1.4234
1.4234
1.0858
1.1153
0.8681
0.8766
1.5136
1.5644
1.3679
1.2932
1.2860
1.2860
0.9754
1.0197
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6.2 Relative valuation
The following table shows our relative valuation results. The estimated EPS, $11.87, is from our Income Statement in the prior section. The comparable P/Es were collected from
Factset Estimate Pages. Those numbers were calculated using current stock price and forward expected earnings. Therefore, the relative valuation should be the estimate for current price. The current stock price of Toyota is $122.74 as of 12/06/13. The relative values of Honda, Nissan, and BMW are bigger than current price. As we discussed before, the other four estimated may not be as reliable as those four. Besides, the estimated of Volkswagen and the industry average is pretty near the current price. Thus, the relative valuation model proves that Toyota’s stock is undervalued and this leads to the decision to buy shares.
E[EPS] relative value company
Toyota
Honda
Nissan
Volkswagen
BMW
Fiat
Ford
Hyundai
KIA
Industry
Average comparable P/E
10.65
8.24 adjustment factor
7.80
9.92
11.86
8.64
1.30
1.60
1.20
1.25
2.00
2.20
5.88
5.39
8.65
1.40
1.40
1.10
11.87
11.87
11.87
11.87
11.87
11.87
11.87
11.87
11.87
11.87
164.37
156.52
111.15
147.19
281.54
225.55
97.71
89.57
112.94
159.22
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7. Absolute Valuation
In order to estimate the intrinsic value of Toyota, Dividend Discount Model was used in the absolute valuation. As a general rule, the value of an asset is calculated by estimating the expected cash flows from owning the assets and discounting them to their present value. The first step in the absolute valuation using the Dividend Discount Model is to determine different costs of capital to provide different price perspectives. The cost of capital is calculated by using the capital asset pricing model.
CAPM:
Risk Market
Risk Premium rf
10yr Actives
10yr Strips
30yr Actives
30yr Strips beta
5yr adj
5yr raw
10yr adj
10yr raw
9.91%
7.22%
2.86%
3.08%
3.64%
4.20%
0.7920
0.6870
0.8210
0.7310
E(r )= k1 k2
E(r )= k3 k4 rf+beta*Risk Premium
9.01%
10.13% rf+beta*[E(rm)-rf]
8.68%
8.88%
We calculated four different costs of capital using CAPM model. The first cost of capital is calculated by using the 10-year Treasury STRIP expiring on 12/06/23 as the risk free rate together with the historical market premium of 7.22% as the risk premium. The second cost of capital is calculated by using the 30-year Treasury STRIP expiring on 12/06/43 as the risk free
42
rate together with the historical market premium of 7.22% as the risk premium. The market risk premium was taken as a historical average.
The third cost of capital is calculate by using the 10-year Treasury STRIP expiring on
12/06/23 as the risk free rate together with the difference between the risk market of 9.91% and the risk free rate. The fourth cost of capital is calculate by using the 30-year Treasury STRIP expiring on 12/06/43 as the risk free rate together with the difference between the risk market of
9.91% and the risk free rate. The Beta for Toyota was taken from the Bloomberg terminal in the
Financial Lab and the 10 year adjusted Beta is used in all our calculation of costs of capital in order to be conservative and can better reflect the systematic risk. Adjusted Beta of 10 years is used because we are forecasting years in the future and in the last 5 years Toyota was facing different problems and a Beta of 5 years would not be accurate to use in the model.
The next step is to determine an estimate for March 2015 dividend per share. In order to get this estimate we used the dividends per share and earnings per share from March 2003 to
March 2014. Because we still do not have the data for dividend per share for March 2014 we used an estimate of Bloomberg of $2.56 for fiscal year March 2014 as we thought the Factset estimate of $3.32 is too high taking into consideration that for half of year was only $1.21. The
2015 expected dividend per share was calculated by using our expected EPS for 2015 of $11.87 determined in our pro forma income statement and the expected 2015 payout ratio of 25%. We decided to use 25% payout ratio as we found out from the 20- F Form that Toyota “will strive to continue to pay stable dividends aiming at a consolidated dividend payout ratio of 30% while giving due consideration to factors such as business results for each term, investment plans and its cash reserves .”
Factset Bloomberg
Mar '03 Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11 Mar '12 Mar '13 Sep '13 Mar '14 Mar '15
EPS
(diluted) 4.51
6.10
6.63
7.42
8.78
9.56
-2.77
1.45
3.07
2.29
7.33
6.39
11.73
11.87
Dividends per Share payout rate
0.52
0.76
0.90
1.55
1.85
2.39
1.93
0.94
1.12
1.17
1.84
1.21
3.32 2.56
2.97
11.49% 12.42% 13.53% 20.90% 21.02% 25.05% -69.57% 64.89% 36.61% 51.19% 25.13% 18.91% 28.30% 25.00%
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The next thing we have done was to find out average annual growth rate of Toyota’s dividend per share. Because of the problems the company had in 2009 and the negative EPS, we took out the year from our growth calculation. From 2003 to 2008 the growth rate was 35.83% and from 2010 to 2013, 25.25%. Including also 2014 using the Bloomberg estimate for 2014 dividend per share, we found a growth rate from 2010 to 2014 of 28.54%. As such, we decided to continually grow the future dividend per share at an average rate of 29 % for the next three years. We limited our forecast for the next three years as we think that on a longer time horizon the growth rate might decrease to a value lower than 29%. Also, as the table below shows, the 5year growth rate is around 5.8% and 7 years is 4.78% using the Bloomberg estimate for 2014.
10 years 7 years 5 years 2003-2008 2010-2014 2010-2013
Growth Mar'13(FactSet) 13.54% 2.49% -5.09%
rate Mar'14(FactSet) 15.93% 8.74% 11.48%
35.83% 37.17% 25.25%
Mar '14(Blm) 12.95% 4.78% 5.83% Blm 28.54%
Mar '15 Mar '16 Mar '17 Mar '18
EPS 11.87
DPS 2.97 3.83 4.94 6.37
In calculating the terminal value of Toyota, we estimated the dividend per share for 2019 using the projected 2018 DPS and growth scenarios from 1 to 9 %. Next, we calculated the intrinsic value of the 2018 estimate using the E[DPS] for 2019 and the constant growth form of the dividend discount model. Further, we determined the present value of the intrinsic value of
2018 estimate for two of our costs of capital founding from CAPM model. To get the intrinsic value of the stock the forecasted dividends per share from 2015 to 2018 were discounted by the two different costs of capital along with the 2018 lump sum values determined under varying growth rate assumption. k 1= 9.01%
2015 2016 2017 2018
DIVS: 2.968 3.828 4.938 6.370 dividend growth 29% 29% 29% 29%
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PV
Growth
1.00%
2.00%
3.00%
3.90%
4.00%
4.60%
5.00%
6.00%
7.00%
7.50%
8.00%
9.00%
2.722 3.221 3.812 4.511
DPS
2019
6.434
6.498
6.561
6.619
6.625
6.663
6.689
6.753
6.816
6.848
6.880
6.944 est(IV2018)
80.3246
92.6919
109.1749
129.5253
132.2378
151.0960
166.8034
224.3361
339.1155
453.5147
681.1806
69436.27 k 2= 10.13%
2015 2016 2017 2018
DIVS: 2.968 3.828 4.938 6.370 dividend growth 29% 29% 29% 29%
PV 2.695 3.156 3.697 4.330
PV
Est(IV2018)
56.8831
65.6412
77.3138
91.7253
93.6462
107.0009
118.1243
158.8671
240.1498
321.1634
482.3884
49172.3538
Growth
1.00%
2.00%
3.00%
4.00%
5.00%
5.90%
6.00%
7.00%
7.50%
8.00%
9.00%
DPS
2019
6.434
6.498
6.561
6.625
6.689
6.746
6.753
6.816
6.848
6.880
6.944 est(IV2018)
70.4710
79.9226
92.0254
108.0769
130.3862
159.4834
163.4992
217.7706
260.3830
323.0011
614.4802
PV est(IV2018 )
47.9058
54.3309
62.5583
73.4700
88.6358
108.4159
111.1458
148.0392
177.0068
219.5743
417.7201
Total PV
2013
61.78
68.21
76.44
87.35
102.51
122.29
125.02
161.92
190.89
233.45
431.60
The current stock price of Toyota is $122.74 as of 12/06/13. In order to reach this price the dividend must grow at least 4.60% annually under the first k, or 5.90% under the second k.
45
TotalPV
2013
71.15
79.91
91.58
105.99
107.91
121.27
132.39
173.13
254.42
335.43
496.66
49186.62
The average annual dividend growth rate from 2003 to 2013 was 14%, and will be 13% based on the Bloomberg estimate for the March 2014 year. Thus, compared to our 4.6% and 5.9%, the valuation model illustrates that Toyota can easily exceed the “current value” growth rates and so stock is undervalued and this leads to the decision to buy shares.
8 ． RISK FACTORS
As with any other company, the future performance of Toyota involves risks and uncertainties. There are different factors that can cause the actual results for the next years to be materially different from what our estimates show. These risks could prevent the shares from reaching our target. The following risks that the company faces were obtained from Toyota’s
2012 20-F form:
The worldwide automotive market is highly competitive.
The worldwide automotive industry is highly volatile.
Toyota’s future success depends on its ability to offer new innovative competitively priced products that meet customer demand on a timely basis.
Toyota’s ability to market and distribute effectively is an integral part of Toyota’s successful sales.
Toyota’s success is significantly impacted by its ability to maintain and develop its brand image.
Toyota relies on suppliers for the provision of certain supplies including parts, components and raw materials.
The worldwide financial services industry is highly competitive.
Toyota’s operations and vehicles rely on various digital and information technologies.
Toyota’s operations are subject to currency and interest rate fluctuations.
High prices of raw materials and strong pressure on Toyota’s suppliers could negatively impact Toyota’s profitability
The downturn in the financial markets could adversely affect Toyota’s ability to raise capital.
The automotive industry is subject to various governmental regulations.
46
Toyota may become subject to various legal proceedings.
Toyota may be adversely affected by natural calamities, political and economic instability, fuel shortages or interruptions in social infrastructure, wars, terrorism and labor strikes.
The risks mentioned above might be grouped into the following risk categories that affect
Toyota.
Economic risk includes any changes in the market demand and the economic conditions of the automotive markets in which Toyota operates, mainly Japan, North America, Europe, and
Asia might represent a threat for the future performance of the company. Fluctuations in currency exchange rates are part of the economic risks that the company was facing all the time and it will face in the future. The foreign exchange rates (US/Australian/ Canadian dollar, EU euro, Russian rubble, British pound) with respect to the value of Japanese yen influences the amount of profit that Toyota earns, but in the current situation the Japanese yen is devaluing because of Abenomics, and positively influences Toyota.
Market risk refers to Toyota’s ability to market and distribute its products efficiently in the markets the company operates. Political and economic instability in the markets might affect the success of Toyota. Some market risks also arise from Toyota’s ability to achieve acceptance from the market for new products that must meet customer demand. Volatility in demand can cause vehicle unit sales to decrease which will worsen the financial condition of Toyota.
Credit risk includes “all changes in the funding environment of financial markets and the consequence of increased competition in the financial services industry” as stated in the company’s 20-F Report. In case of crises periods financial institutions will not be able to provide capital to the financial markets. In this situation, it will be difficult for Toyota to raise capital as expected and the financial condition of the company will deteriorate.
Operational risk is related to Toyota’s capability to realize production in the most efficient way and apply capital expenditures according to the company’s budget and time frame.
Operational risk includes also any changes in the laws, regulations, and government policies related to vehicle safety. Also the increase in price of Toyota’s raw materials (steel, precious metals, non-ferrous alloys including aluminum, and plastic parts) as well as the company’s
47
reliance on its suppliers and on various digital and information technologies might distress the production of its products.
Political risk exists as Toyota sells its product internationally and because of the vehicle safety regulations some countries might impose tariffs and other trade barriers, taxes and levies, or enact price or exchange controls. According to the 2012 20-F Report, “Toyota has incurred, and expects to incur in the future, significant costs in complying with these regulations.”
Litigation risk refers to future legal proceeding and investigations that might be the result from product liability and infringement of intellectual property. As stated in the company’s 20-F report from 2012, “Toyota is in fact currently subject to a number of pending legal proceedings and government investigations of vehicle safety including remedial measures as recalls, trade, environmental protection, vehicle fuel emission levels, pollution.” All these litigations affect the company’ brand image and such the company needs to struggle to further increase customer’s confidence by providing safe and high quality products.
Environmental risk includes any natural calamities like earthquakes that affect both the production and the sales of vehicles. The company talks in their 20-F Report also about other possible situations like fuel shortages, interruptions in electricity, transportation systems, gas, water, or communication systems resulting from natural hazards or technological hazards; wars; terrorism; and labor strikes in the major markets where Toyota purchases materials, components and supplies for the production of its products or where its products are produced. All these negative factors represent a threat for the future of the company.
9. Conclusion and Recommendation:
From the ratio analysis, we can analyze that overall Toyota is in the average industry level. Especially, for EBIT margin and TIE, Toyota performs best in the industry. Based on the relative valuation model, Toyota is attractive when comparing the market value at Dec 6 $122.74 with our average comparable price of $154.06 ($159.22). Based on absolute valuation model, the present value of stock is currently undervalued, if future average dividend growth rates are above
6%. Thus, owning to the result of absolute value model, relative value model, financial performance and macro-economic policy influence, we strongly suggest SMIF to increase
48
holding Toyota. We suggest SMIF increase holding shares of Toyota from 150 to 300. In our analysis, we strongly believe this investment choice will benefit SMIF a lot.
49
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