Toyota Motor Corporation (ADR) (NYSE:TM) is making a comeback, while Subaru continues to focus on safety and is moving to higher-margin vehicles. Kingdon notes that Mazda has the biggest upside with the most risk. All three car stocks trade at forward price-to-earnings ratios of less than 10, but Kingdon sees fair value of 13 times.
Assuming Toyota Motor Corporation (ADR) (NYSE:TM) trades at 13 times forward earnings, its fair value is over 10% higher than current trading levels. Kingdon notes that the wages of workers will be rebounding in Japan and the U.S., which will lead to higher Toyota sales. Sales are expected to be up 7% in fiscal 2014.
Back in 2008, Toyota took the top stock as the largest seller of vehicles by volume. But thanks to various Asian-specific issues, including the Tohoku earthquake and tsunami, it lost this top spot. But in 2012, Toyota regained its title as the leader, surpassing General Motors Company (NYSE:GM). Toyota Motor Corporation (ADR) (NYSE:TM) sold 9.7 million vehicles in 2012, compared to General Motors Company (NYSE:GM)’s 9.3 million.
For fiscal 2013, over 25% of Toyota’s unit sales were generated in Japan. The company hopes to maintain its market leadership in the country with the introduction of new cars. This should help it to achieve its goal of 40% market share in Japan. Meanwhile, North America makes up 28% of revenue, where Toyota has been increasing production over the past few years.
Toyota Motor Corporation (ADR) (NYSE:TM) also owns the number-one spot in hybrid offerings and plans to introduce eight compact car models in the emerging markets by 2015. This includes Brazil, China, India and Indonesia. Toyota is hoping that sales to emerging markets will be 50% of sales by 2015, compared to 19% in 2000.
Major comp
Toyota Motor Corporation (ADR) (NYSE:TM)’s most notable peer is its Japanese rival Honda Motor Co Ltd (ADR) (NYSE:HMC). Analysts expect a 22% rise in fiscal 2014 revenue. Honda Motor Co Ltd (ADR) (NYSE:HMC) has the most exposure to the North American market among the three major Japanese automakers. While this is great for Honda, assuming that the U.S. continues its robust growth, I like the fact that Toyota has some of the best exposure to the faster growing emerging markets.
Autos accounted for nearly 80% of Honda Motor Co Ltd (ADR) (NYSE:HMC)’s fiscal 2012 sales, while motorcycles were 13.5%. The company’s production operations are conducted primarily in 30 separate factories, four of which are located in Japan. Even still, during fiscal 2013, nearly 70% of sales were from outside Japan.
Competition abroad
General Motors Company (NYSE:GM) still has the government bailout and bankruptcy filing overhang, but I believe the company is now a turnaround story. GM has been shrinking its North American production, while focusing on on fewer brands. The company is turning to the emerging markets for future growth. China and India, the world’s two most populous countries, are the keys. It plans to invest $11 billion in the countries by 2016.
For China, General Motors Company (NYSE:GM) plans to build four new plants in the country; this should help boost annual production to 5 million vehicles and triple exports from Chinese plants. Its bankruptcy allowed the company to shed billions of dollars in liabilities. General Motors Company (NYSE:GM) has strengthened its balance sheet since its bankruptcy, now having over $20.5 billion in cash as of 1Q, compared to total debt of $18.4 billion. This cash balance was boosted by the 1Q 2013 free cash flow of $1.4 billion generated in 1Q, compared to the $280 million in the same quarter last year.
Bottom line
It’s hard to disagree with Kingdon when you consider that Toyota is trading at a forward P/E ratio that’s 11.7 times — this is below Honda’s 13 times. Toyota Motor Corporation (ADR) (NYSE:TM) appears to be a leader and it’s breaking into the emerging markets. Meanwhile, General Motors Company (NYSE:GM) is also an interesting investment choice. The automaker trades at only 8.3 times forward earnings and is still very much a turnaround story.
The article Kingdon Is Finding Alpha in the Japanese Kingdom originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends General Motors. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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