This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best...
You have to figure that Monday felt like a good day to own Toyota (NYSE: TM  ) stock. Over the weekend, the news went out that archrival General Motors (NYSE: GM  ) was waving the white flag on its vaunted Chevy Volt. In the face of waning buyer enthusiasm and conspicuous silence from General Electric (NYSE: GE  ) , which had promised to buy the vehicle in droves but then failed to do so, GM announced it is suspending production of the Volt for a few weeks to try to drain off the backlog of unsold vehicles clogging dealer lots.

Some pundits immediately rushed to declare the Volt a boondoggle and call for its cancellation. But whether that's the car's ultimate fate, one analyst at least sees this as very good news for Toyota. Yesterday, the bankers at Credit Suisse used the Volt's short-out as an occasion to upgrade Toyota shares to outperform.

What's the plural of "Prius"?
They may be right to do so. Chevy fell far short of its goal of pushing 10,000 Volts out the door last year, ringing up just 7,671 sales in 2011. That same year, Toyota moved 400,000 units' worth of Prius-shaped metal. With 2 million "Prii" sold since the car was invented, Toyota remains the undisputed world champion of hybrid car sales.

It's also gearing up to turn the term "Prius" into a brand name akin to Scion. Over the next couple years, Toyota aims to bring three new Prius models to dealer lots:

  • A Prius V five-seater that won't cost that much more than an ordinary Prius but will get 95% of the original's gas mileage and boast 60% more cargo room.
  • A plug-in Prius, which aims to trump both Nissan's only semi-successful Leaf and Ford's (NYSE: F  ) new electric Focus in one fell swoop.
  • And a Prius C variant for city commuters, which should not only boast better gas mileage than any other non-plug-in, but also undercut every other rival hybrid on the market on pricing.

And of course, one key reason Toyota is able to make these big bets is the fact that more than a decade after the first Prius hit the road, buyers know the car -- and, importantly, its battery -- has a viable resale market. When Ford finally brings its electric Focus to market, and when Tesla (Nasdaq: TSLA  ) begins delivering its Model S, they're bound to encounter at least some skepticism from buyers leery of the longevity of these vehicles. But according to auto auctioneer Manheim, your average 10-year-old Prius can still fetch close to 20% of its original sticker price at auction today. No one introducing a "new" hybrid today can make the same claim.

What's the singular of "surrender"?
But even that's not the end of Toyota's advantages. Capitalizing on its lead in this market, Toyota's launching its new models with cut-rate pricing across the board. As Ford, Nissan, and Chevy try to interest car buyers in electric and part-electric vehicles starting at $40,000 a pop, Toyota says its new Prius V could cost as little as $25,000 -- no government subsidies required.

In the face of this assault, Toyota's opponents are retreating in disarray. It's not just GM and the Volt interruption, you know. Ford recently announced that even as it launches the new electric Focus and the C-MAX hybrid, it's canceling its hybrid Escape SUV. Meanwhile, by all accounts, the only place Nissan is enjoying real success with its Leaf is in California, where government-issued perks for zero-emission vehicles give the all-electric vehicle an edge.

Have you invested in Toyota lately?
So with all these advantages Toyota's got piled up in the trunk, and with Credit Suisse now urging investors to pile into the stock, why is it that I still haven't taken the plunge myself? Fair question, and I'll answer it now:

Toyota may "own" the hybrid market, but as far as I can tell, it's still not a market worth owning. Pundits opine that on average, Toyota is making roughly $3,000 in gross profit on each Prius sold. But at an average MSRP of $25,000, that only works out to a 12% gross margin on the car at best. Problem is, 12% is about 2 percentage points less than Toyota's overall gross margin on its cars.

Foolish takeaway
Toyota's inability to earn a premium profit on a popular product like the Prius is part of the reason its stock looks so very overpriced relative to the competition. At 13 times next year's estimated profit, Toyota sports a forward P/E ratio roughly twice as expensive as Ford or GM -- both of which earn better operating profit margins than Toyota claims. (Ford and GM are also generating free cash flow, which Toyota is not doing, but don't get me started on the subject of automotive free cash flow.)

Long story short, I'd rather own a profitable automaker than a popular one. So far, Toyota's scoring only one-for-two in my book is and not worthy of a "buy."

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Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 383 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors, Ford Motor, and Tesla Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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  • Report this Comment On March 07, 2012, at 10:58 PM, kmaines wrote:

    did i miss the upgrade/downgrade info here?

  • Report this Comment On March 08, 2012, at 1:18 AM, TMFDitty wrote:

    "Yesterday, the bankers at Credit Suisse used the Volt's short-out as an occasion to upgrade Toyota shares to outperform."

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