Toyota Motors: Worth Investing in?

Stock market represents a general term for an organized trading of securities on various

exchanges and electronic market. Common stocks, preferred stocks, options, rights, convertibles,

bonds, futures, and others are sold in stock market. As a part of regular class activity in

Investment class, a close analysis of some of the stocks was made by the students. A lot of

stocks, bonds, options, futures, and others were traded as a part of the trading activity.

My portfolio, at the end of the trading cycle was fairly stable. The stocks that I purchased

included Glaxosmithkline Plc (GSK), Toyota Motors (TM), Wal-Mart (WMT), Microsoft

(MSFT), TXU Corp. (TXU), Yahoo! (YHOO), and Qwest Communications International Inc.

(Q). The other transactions included the buying of B-AMR (option), and OGM670.CMX (bond).

The market ran fine most of the times except for at the times when the whole stock market went

down. For example, the stock market was down on March 14, 2007 where the Dow Jones

Industry Average was down by almost 150 points. This illustrates that stock market on one hand

might generate profits but the risks are associated in every transaction made. The following

graph illustrates the fluctuations in the stock market and thus the portfolio values.
Hence, stock market is an unpredictable market but a lot of factors might be analyzed to reduce

the risk associated with stock market. These factors include the company’s future growth

potential, earnings, P/E ratio, and others.

One of the stocks that I purchased was of Toyota Motors (TM). Toyota is a world famous

brand for its strong, fuel efficient, and environment friendly cars. Based in Japan, Toyota trades

all around the world. Needless to say, one of the biggest markets for Toyota is United States. It

has a current market capital of $225.39 billions where as the average industry market capital is

only $17.58 billion. The P/E ratio is 14.83 which means the average investors can receive their

total investment in roughly 14.83 years. Usually when the P/E ratio is a higher number (say 50),

it means that the investors should wait for longer time to receive their invested amount back.

This would mean that lower the P/E ratio the sooner the time comes for the investor to go break

even and the return after the breakeven point is true profit. Meanwhile, if the P/E ratio is too low,

usually the earnings might be overstated thus creating a condition for watered stock. This would

mean that the investor cannot receive the promised returns. The other measure that is liked with

P/E ratio and probably the most prominent factor is earnings or net income. One of the basic

importance of earnings is that if the company is increasing its earnings, the investors feel safe

that they would get enough returns. The net income of the company was growing. During the

financial year ending 2005, the net income available to the shareholders was $10,907,000,000

and then in year ending 2006 was $11,681,000,000. This was a gradual progress in the company.

The basic assumption behind the companies with higher earnings is that higher the earnings,

more flexibility for the company, higher potentiality for growth, and more net income available

to the shareholders. The 8% increment in the stockholders’ equity over 2005 and 2006 was

another plus point for Toyota.

 On the other hand, financial news plays an important aspect for the company’s increment

in stock price. As the Chairman of the board of directors Fujio Cho illustrated in his message for

the stakeholders, Toyota is expanding its territory globally. Following this, a lot of other

headlines regarding the progresses made by Toyota were printed. For example Associated Press’

news said ‘Global Production at Toyota up in February’, AP also said ‘High demand for hybrid

cars’, CNN Money.com’s news said ‘Nissan to cut down 1500 jobs’, PR Newswire’s news said

‘Toyota to open plant in Mississippi’, bizjournals said ‘Toyota to open a new distribution center

in Northern Kentucky’, AP’s news read ‘Lexus named World Car of the Year’, and other news

were also coming out. On one hand Toyota was getting favorable news where as its competitors

like GM and Ford were getting unfavorable news like loosing sales and cutting jobs. This news

gives a glimpse how Toyota is progressing. Needless to say, just ordinary news cannot be the

sole reason for the stock prices to go up. The investors should have a solid reason to believe

whether this would be a fruitful stock to pay for. In Toyota’s case, the solid earnings and a

potential for growth are clearly visible.

Toyota is an outstanding stock in its industry was well. If analyzed, it excelled the

industry average and its competitors in a lot of aspects. For example, the quarterly revenue

growth for the industry is averaged at 7.70% but Toyota reports it to be 15.20 %. Its other major

competitors like Ford, GM and Honda report it to be -13%, -2.6%, and 12% respectively.

Another sector that Toyota excels the industry and competitors is Earnings per Share (EPS).

Toyota reports its EPS as 8.42 where as industry average is just 1.21. Toyota also has a better P/E

ratio of 14.83 when the industry average is 19.02. Not only do the numbers talk but the news also

reveal a lot of secrets why Toyota stands better than the industry. Needless to say, after analyzing
the numbers and the news, Toyota can be accepted as the biggest car manufacturer in the whole

world.

The history of Toyota is also impressive. It started its operation in the US in 1957, a time

where an imported car was doubted to be able to win market share in the United States. This was

the time when the Americans wanted big trucks; Toyota came with fuel efficient small vehicles.

Amidst a lot of struggle, Toyota has been able to operate eight plants in different parts of the

United States today and has the highest number of sales. But the future for Toyota looks even

more productive. As the gas prices have gone up and environment issues are often talked about,

there is a vast need for environment friendly and fuel efficient vehicles. One of the reasons why

Toyota has been able to excel in these fields is that it has been able to beat the market in terms of

technology and future expectations. For example, keeping in mind that there will be a threat of

environmental issues in the future, Toyota had started building its hybrid cars during 1980s.

Though a lot of American families still prefer big vehicles, it has been a must that they switch to

something smaller and the best name that comes up is Toyota. Quality is another important

aspect that comes in play for Toyota’s popularity. Whenever there is a question about quality,

Toyota believes in the concept of total quality management. It receives premium quality of raw

materials from the suppliers and chooses skilled technicians to build up the vehicles. After the

vehicles are ready, a series of collision tests are performed and the flaws are then corrected.

Finally, after a close supervision of the final products, they are brought to the market.

Toyota’s opening of new plants in the United States is yet another step towards

minimizing the foreign exchange risks.

Month
Year
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1949–
360
71
 1972 308
1973 301.15 270.00 265.83 265.50 264.95 265.30 263.45 265.30 265.70 266.68 279.00 280.00
1974 299.00 287.60 276.00 279.75 281.90 284.10 297.80 302.70 298.50 299.85 300.10 300.95
1975 297.85 286.60 293.80 293.30 291.35 296.35 297.35 297.90 302.70 301.80 303.00 305.15
1976 303.70 302.25 299.70 299.40 299.95 297.40 293.40 288.76 287.30 293.70 296.45 293.00
1977 288.25 283.25 277.30 277.50 277.30 266.50 266.30 267.43 264.50 250.65 244.20 240.00
1978 241.74 238.83 223.40 223.90 223.15 204.50 190.80 190.00 189.15 176.05 197.80 195.10
1979 201.40 202.35 209.30 219.15 219.70 217.00 216.90 220.05 223.45 237.80 249.50 239.90
1980 238.80 249.80 249.70 238.30 224.40 218.15 226.85 219.20 212.00 211.75 216.75 203.60
1981 205.20 208.85 211.40 215.00 223.50 225.75 239.75 228.75 231.55 233.35 214.15 220.25
1982 228.45 235.20 248.30 236.30 243.70 255.55 256.65 259.60 269.40 277.40 253.45 235.30
1983 238.40 235.55 239.30 237.70 238.60 239.80 241.50 246.75 236.10 233.65 234.20 232.00
1984 234.74 233.28 224.75 226.30 231.63 237.45 245.45 241.70 245.40 245.30 246.50 251.58
1985 254.78 259.00 250.70 251.40 251.78 248.95 236.65 237.10 216.00 211.80 202.05 200.60
1986 192.65 180.45 179.65 168.10 172.05 163.95 154.15 156.05 153.63 161.45 162.20 160.10
1987 152.30 153.15 145.65 139.65 144.15 146.75 149.25 142.35 146.35 138.55 132.45 122.00
1988 127.18 128.12 124.50 124.82 124.80 132.20 132.53 134.97 134.30 125.00 121.85 125.90
1989 129.13 127.15 132.55 132.49 142.70 143.95 138.40 144.28 139.35 142.15 142.90 143.40
1990 144.40 148.52 157.65 159.08 151.75 152.85 147.50 144.50 137.95 129.35 132.75 135.40
1991 131.40 131.95 140.55 137.42 137.97 138.15 137.83 136.88 132.95 131.00 130.07 125.25
1992 125.78 129.33 133.05 133.38 128.33 125.55 127.30 123.42 119.25 123.35 124.75 124.65
1993 124.30 117.85 115.35 111.10 107.45 106.51 105.60 104.18 105.10 108.23 108.82 111.89
1994 109.55 104.30 102.80 102.38 104.38 98.95 99.93 99.57 98.59 97.37 98.98 99.83
1995 98.58 96.93 88.38 83.77 83.19 84.77 88.17 97.46 98.18 101.90 101.66 102.91
1996 106.92 104.58 106.49 104.29 108.37 109.88 107.13 108.40 111.45 113.27 113.44 115.98
1997 122.13 120.88 123.97 126.92 116.43 114.30 117.74 119.39 121.44 120.29 127.66 129.92
1998 127.34 126.72 133.39 131.95 138.72 139.95 143.79 141.52 135.72 116.09 123.83 115.20
1999 115.98 120.32 119.99 119.59 121.37 120.87 115.27 110.19 105.66 104.89 102.42 102.08
2000 106.90 110.27 105.29 106.44 107.30 105.40 109.52 106.43 107.75 108.81 111.07 114.90
2001 116.38 116.44 125.27 124.06 119.06 124.27 124.79 118.92 119.29 121.84 123.98 131.47
2002 132.94 133.89 132.71 127.97 123.96 119.22 119.82 117.97 121.79 122.48 122.44 119.37
2003 119.21 117.75 119.02 119.46 118.63 119.82 120.11 117.13 110.48 108.99 109.34 106.97
2004 105.88 109.08 103.95 110.44 109.56 108.69 111.67 109.86 110.92 105.87 103.17 103.78
2005 103.58 104.58 106.97 105.87 108.17 110.37 112.18 111.42 113.28 115.67 119.46 117.48
2006 117.18 116.35 117.47 114.32 111.85 114.66 114.47 117.23 117.91 118.01 117.23 115.57
2007 118.72 121.29 115.86

If we look at the historical prices above, there is a high fluctuation in exchange rate between

Japanese Yen and US dollars. Being a multinational company, when Toyota produces its

automobiles in Japan, the manufacturing cost is associated with the Japanese Yen. Now when
they are exported to United States, the exchange rate creates a lot of problems. For instance, if

the vehicles are manufactured when Yen was devalued with UDS and later it appreciates with

USD when it is time for Toyota to sell its products, Toyota should sell the products in a higher

price to compensate for the appreciation of Yen. This is a complete opposite of what the

American customers are looking for. Hence, when it opens new plants in the US itself, this

exchange rate risk is minimized. This would let Toyota manufacture its products at the local

prevailing prices.

Also, when the manufacturing plants are established locally, this would give local

employment. This will create a positive mentality for these people to believe in Toyota. For

example, Wal-Mart has been able to be most people’s favorite because it operates and employs

people locally. When companies operate and employ people locally, the state government also

gives tax benefits to these local companies. Apart from some tax exemptions, the state

government also provides them with land and other resources that the state government can

afford.

These are the major reasons why I thought Toyota (TM) would be a good stock to invest

in. Though TM would not generate an immediate high return, this stock would keep on giving

great returns. Assumptions might be made that Toyota’s market might be saturated but I think

there is still a lot of room for Toyota to progress. On one side the need for fuel efficient small

cars is towering in US itself as discussed earlier where as on the other side, Toyota is increasing

its market throughout the world.

75 stocks for TM were bought for $126.94 in market price. Also, a commission of $25

was associated with the transaction. This totaled $9545.50 paid in total. The reasons why 75

stocks were bought were to minimize the effect of the commission over the number of stocks.
For example had I bought 50 stocks, this would mean $0.5 paid per stock as commission but now

as 75 stocks were bought, $0.33 was paid in average per stock. But this does not mean that

higher the number of stocks, lower the per stock commission, and better the transaction. But in

fact there is a need for tradeoff between the price paid and the return anticipated. Around

$10,000 was supposed to be the best investment amount and 75 was the perfect number of stocks

that could be purchased by minimizing the effect of commission.

The stock was purchased in market price. Market price refers to buying or selling of stock

at the immediate best price when the order reaches the trading floor. Had it been felt that the

price for TM was going down; short sell would have made sense. Similarly, had there been a case

that a risk could have been assumed for a commission, options would have been bought or had

there been news or reasons for buying the stock in certain given price, limit order had been an

option. Since, the price of TM seemed to be flowing up eventually with the market and beating

the market, market order was supposed to be the best option.

Hence, for all these reasons, 75 stocks of TM were bought for $126.94 market price.

During the overall range, the stocks were progressing and I as an investor am getting favorable

results.

Works Cited:

<http://72.14.205.104/search?q=cache:PYgcTspEMyQJ:en.wikipedia.org/wiki/Japanese_yen+19
90s+japanese+yen+us+dollars&hl=en&ct=clnk&cd=2&gl=us>

<www.finance.yahoo.com>
<www.toyota.com>

<www.stocktrak.com>