Stock of the Day - February 27, 2009 - TM

Toyota Motor Corporation (TM)

The Toyota Motor Corporation (TM) surpassed General Motors (GM) in total worldwide auto sales in for the first time ever in 2008, and the Japanese automaker is currently the top dog in the car industry. But is now a good opportunity to buy shares of Toyota? Declining macroeconomic conditions, higher manufacturing costs, and lowered consumer demand will probably drive the company’s share price lower in upcoming months.

The auto industry is hurting. Badly. The “worst recession since the Great Depression” has beaten up many sectors, but it has put car sales on life support. Toyota said sales fell 32% in January, while Chrysler and GM reported drops in sales of 55% and 49% respectively. Layoff scares, the credit crisis, and a general lack of confidence in the economy have caused consumers to tighten their wallets and avoid purchasing cars.

Toyota realizes that demand will decrease significantly in 2009, and the automakers worldwide production fell 39.1% this January compared to January of 2008 in response to this steady drop in demand. Toyota posted a loss for the first time since 1950 in the quarter that ended in December. The company is forecasting a $5 billion loss for its fiscal year ending on March 31, 2009. The automaker is also being hurt by the higher price of the Japanese Yen, as a higher Yen equates to higher manufacturing and material costs.

Toyota may change its attitude towards expansion and growth during recessionary times. Three major executives are leaving the company, including current president Katsuaki Watanbi. Akio Toyoda, grandson of the company’s founder, will be the new president. Toyoda plans on eliminating the ‘revolutionary change’ that his predecessor was noted for creating. It appears that Toyota worked in excess and spent money inefficiently, but that was permissible when time were good and there were large amounts of income. Lower margins in this economy will force the company to act more frugally.

The demand for Toyota’s vehicles tends to increase when gas prices are high. The Prius hybrid and other vehicles are more economically feasible when oil is expensive. The recession has caused oil and gas prices to drop to low levels. Interestingly, the drop in Toyota’s sales may not be a result of the fall of the general car market. Lower gas prices may be partly responsible for Toyota’s car sales to decrease.

Although there are many short-term problems for Toyota, there is no doubt that the company knows how to make cars that consumers value. Toyota came out on top in the Consumer Reports’ annual review last week of the best cars and trucks. Toyota won best midsized SUV for the Highlander, best small SUV for the RAV4, best minivan for the Sienna, best Green car for the Prius, and the best value for the dollar with its Prius Touring edition.

Toyota is currently trading around $63. And while this number is 43% lower than its 52-week high of $111.47, I can’t rule out a further decline in price. The short-term staying power of the company is what concerns me. I expect stock prices to fall in the short term and rise dramatically when macroeconomic conditions improve. It’s very difficult to tell when the fall will start and the rise begins, but Toyota will definitely be a great deal when signs begin to turn up. I believe Toyota is currently the best carmaker around, it still has a great brand name, and it will definitely succeed in the long term. Having said this, I would wait a few months to watch Toyota’s new leadership, changing oil prices, and general economic conditions and then reevaluate the company. We could be missing a bargain by holding off now, but I don’t believe buying is currently worth the risk.

-Matt Schwartz

College Trillionaire