Toyota's (TM) Green Revolution: Time to Bet on This EV Underdog?
In an ambitious shift, Japan’s auto giant Toyota TM has unveiled new strategies to become a frontrunner in the electric vehicle (EV) market, which has sent its stock soaring. Also, despite some overseas investors questioning the independence of Toyota's board,the consensus has largely been supportive of the company's fresh course of action. Shareholders rejected proposals to seek greater disclosures on Toyota's climate lobbying and unanimously voted in favor of all proposed board members. Shares of TM extended their winning streak for the fifth straight session yesterday, rising 4.74% to close at $165.57.
With a soaring share price and a bold new strategy, is Toyota a smart bet in the evolving EV market? Or should you book profits from the rally as it is currently hovering near its 52-week highs? First, let’s take a closer look at the substantial shift in Toyota’s EV strategy.
A Long-Awaited Wake-Up Call
After two decades of steadfastly focusing on hybrid powertrains and hydrogen as the future of transportation, Toyota is now waking up to the reality of electric cars. The company has been slow to adapt to the EV revolution, with some of its initial forays, like the Prius Prime and RAV4 Prime plug-in hybrids, being seen as tentative steps rather than full commitments.
However, various auto giants’ shift to electric, the success of EV behemoth Tesla TSLA and China's embrace of green vehicles seem to have sparked a transformation in Toyota's strategic outlook.
A New Direction Under New Leadership
Toyota's previous reluctance to fully embrace EVs stemmed from a belief that the market was not yet "mature enough" and that EVs were only one part of the solution to achieving carbon neutrality. With the recent change in leadership from Akio Toyoda to Koji Sato, Toyota is demonstrating a newfound commitment to EVs.
TM announced that it would soon offer electric cars with a range of 600 miles or more through the "integration of next-generation batteries and sonic technology." Its plans also include the introduction of a full lineup of electric Toyota and Lexus cars by 2026. TM has shifted about half of its R&D staff and expenses into its Advanced Development work as of March.In May, it launched BEV Factory, a space designed specifically for innovating battery EV technology.
TM’s Technological Breakthroughs & EV Strategy
Toyota claims it has achieved a "breakthrough" in solid-state battery technology. Central to the company’s strategy is the development and mass production of all-solid-state batteries for its EVs. It plans to commercialize this technology from 2027 to 2028, aiming for a 20% improvement in the cruising range compared to current batteries. Additionally, a higher-specification model under research and development is targeting a 50% improvement in cruising range. The company's solid-state batteries promise longer durability and the potential to significantly reduce production costs.
The BEV Factory aims to produce EVs with a driving range of 1,000 kilometers (620 miles), which is a significant improvement over competitors like Tesla, whose Model 3 has a range of approximately 430 to 570 kilometers. The ambitious target is to produce about 1.7 million vehicles by 2030. Toyota aims to achieve sales of 1.5 million all-electric vehicles per year by 2026, and 3.5 million units annually by 2030.
On the production front, the company is adopting Giga casting, an innovative assembly-line automation technology introduced by Tesla. This change in production could potentially halve factory investment costs. This approach allows significant component integration, reducing vehicle development costs and factory investment. In addition, Toyota plans to use artificial intelligence to achieve automotive designs with a high level of efficiency, aiming for a coefficient of drag of less than 0.20.
Continuing Commitment to Hydrogen
Despite its massive EV push, Toyota has not abandoned its plans for vehicles powered by hydrogen. The company is setting up a Hydrogen Factory to develop the technology further, especially for commercial customers. It is investing in the future of hydrogen power, launching a new division to integrate the technology and build relationships with corporate partners for research and development.
A Catch-Up Game in the EV Market
While Toyota recognized the EV revolution later than its competitors, it is still the largest car company in the world by volume. Some industry observers believe that if any company can make up for lost time in the EV market, it's Toyota.
Although Toyota is entering the EV market late, its size, commitment to innovation, and new strategic focus could make it a strong contender. The firm's ambitious plans show promise but its success will depend on its ability to overcome the significant lead other companies have established in the EV market.
Despite some critics taking issue with Toyota's strategy of focusing on multiple fronts across hybrid, gasoline, and electric vehicles, the company maintains that this approach helps cater to the diverse needs of customers in different regions, a strategy it believes will yield dividends in the future.
So, should you invest in TM’s bold leap into the EV arena?
The Zacks Rundown
Toyota is part of the Zacks Automotive—Foreign industry, which currently ranks in the top 11% of all Zacks Ranked industries, indicating solid prospects. By focusing on leading companies from the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
TM has exceeded earnings estimates in three of the past four quarters and missed once, with the average negative surprise being 0.94%. The Zacks Consensus Estimate for the company’s current fiscal sales and earnings implies 11% and 23% year-over-year growth, respectively. Encouragingly, the company is witnessing northbound revision in estimates. The consensus mark for EPS for the current fiscal has moved up 88 cents over the past 30 days.
Amid all the excitement, the valuation metrics of TM are not that appealing. At 9.97X earnings, it’s higher than 8.12X for the industry. Even on the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the company is not trading cheap. It is currently trading at 10.88X compared with the industry’s 8.20X.
A Word of Caution
Toyota's high debt levels are concerning. As of Mar 31, 2023, the company's long-term debt was ¥17.07 trillion, higher than ¥15.3 trillion recorded as of Mar 31, 2022. The debt load is also quite high when compared to cash and cash equivalents of ¥7.5 trillion. Toyota's debt-to-capitalization stands at 50% versus the industry’s 35%. High capex and R&D expenses on advanced technologies may further affect near-term financials.
Wait-And-See Approach For Now
Toyota's aggressive push toward electrification, backed by advanced battery technology, improved production methods and continued focus on hydrogen power signals a new era for the automaker. With a renewed commitment to the energy transition and a promising lineup of EVs on the horizon, Toyota is poised to shape the future of the automotive industry.
But one shouldn’t overlook Toyota’s stretched balance sheet. Also,the current valuation metrics of the company reflect a premium price for its shares. Considering these factors, its wise to wait for a better entry point. The company's ability to meet its goals and maintain its position as a leading car manufacturer in the era of EVs is yet to be seen.
TM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
2 Top-Ranked Players From the Auto Space
Ford F: It is one of the leading automakers in the nation. A strong vehicle mix supported by F-series trucks and SUV models, combined with a robust EV lineup, should drive Ford’s growth.
Ford currently sports a Zacks Rank #1 and has a Value Score of A. The Zacks Consensus Estimate for F’s 2023 sales implies year-over-year growth of 7.5%. The consensus mark for Ford’s 2023 and 2024 EPS has moved north by 9 cents and 5 cents, respectively, over the past 30 days.
General Motors GM: One of the world’s largest automakers, General Motors held the largest share of the U.S. auto market at 16% in 2022. General Motors’ compelling portfolio witnesses strong demand for quality full-size pickups and SUVs.
GM currently sports a Zacks Rank #1 and has a Value Score of A. The Zacks Consensus Estimate for General Motors’ 2023 sales implies year-over-year growth of 4.5%. The consensus mark for GM’s 2023 and 2024 EPS has moved north by 54 cents and 52 cents, respectively, over the past 60 days.
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