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Does Toyota's Strength Make It a Buy?

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Few companies have brands that are as ubiquitous and respected around the world as Toyota (NYSE: TM  ) . Japan's largest automaker has built an enviable reputation for product quality and manufacturing efficiency -- so enviable that many of its methods have become de facto auto-industry standards.

Emulating Toyota's manufacturing methods has done wonders for companies such as General Motors (NYSE: GM  ) and Ford (NYSE: F  ) . But over the past few years, Toyota has faced a sea of troubles: First, a recall scandal dented its previously formidable reputation for quality. Then, just as it was beginning to recover, a massive tsunami in northern Japan decimated its supplier network and left some of its assembly lines idled for months.

But for all that, Toyota's resiliency has been impressive. The Japanese giant has bounced back in impressive style and is once again challenging GM for global auto-sales supremacy in 2012.

But is Toyota a buy? That's a more complicated question. To help answer it, I created a premium research report to help investors understand the challenges facing Toyota, and the opportunities presented by the company.

Following is an excerpt from the report. We hope you enjoy it.

Toyota's enduring strength
In the face of increased competitive pressures, CEO Akio Toyoda acknowledged that the company needed to up its product game. And it has started to do so: An all-new version of the Camry sedan, a huge seller in the U.S., was released late in 2011. While it initially garnered mixed reviews -- some reviewers thought it too conservative relative to bolder entries from the likes of Hyundai (NASDAQOTH: HYMTF  ) and Nissan (NASDAQOTH: NSANY  ) -- it has proven to be a very strong seller. Through September 2012, Camry sales in the U.S. were up 37.1% over year-ago totals.

Toyota's efforts to expand the Prius hybrid lineup have also been well-received. The Prius was already Japan's best-selling car, and a strong seller here in the U.S., a position Toyota has strengthened with the addition of two related models. The (smaller) Prius c and (larger) Prius v have both found ready buyers, expanding Toyota's hybrid-car lead even as rivals like Ford make aggressive pushes to expand hybrid offerings.

In the U.S., as in most of the world, Toyota's value propositions are quality and efficiency. Its cars may not be the most exciting, but they are safe choices -- likely to last a long time, with minimal maintenance, while delivering good fuel economy. While the sudden-acceleration recall fiasco seemed to dent Toyota's reputation for a time, those impacts largely seem to have faded -- helped by Consumer Reports surveys that once again rate Toyotas at the top of the heap for quality. A recent study by Experian found that Toyota had regained the top spot in Corporate Loyalty for the first time since the third quarter of 2009.

That story, with variations, replays itself over and over around the world. In countries from Indonesia, where Toyota's Avanza is the runaway best-seller, to South Africa, where three of the top five sellers are Toyotas, Toyota's simple value proposition continues to find plenty of customers.

One exception to that rule has been Europe, where Toyota's presence is minimal. In recent years, that has worked to the Japanese giant's advantage, as market leaders Volkswagen (NASDAQOTH: VLKAY  ) , Ford, and GM all confront a recession-ravaged auto market that has led to significant losses. Toyota's decision to largely steer clear of Europe increasingly looks like a smart one, as GM and Ford have both struggled to contain losses running in the hundreds of millions of dollars every quarter.

It's a good story. But on the other hand, CEO Akio Toyoda and his team still have major challenges to confront.

Looking for more insight?
That was just a sample of The Motley Fool's new premium report on Toyota. If you're weighing whether the company is a buy or sell, this new report is an essential resource for investors seeking to understand the potential ups and downs of an investment in the electric-car manufacturer. Not only that, but the report also comes with updated quarterly guidance and dives into upcoming catalysts on the horizon. Just click here now to get started.

Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 24, 2012, at 6:03 PM, autoinsider wrote:

    I wish Motley would have bought another auto stock. Constantly touting Toyota is getting tiresome. They'ave reached their zenith and are now on the decline, as a company and as a stock. Look at the charts. They've gone nowhere in literally years. They're right about one thing though. Toyota is as bland and commoditized as a transportation can get.

  • Report this Comment On November 24, 2012, at 11:02 PM, MARKETSURFER wrote:

    Toyota is actually a good short candidate now. They are operating under a crushing debt load of

    $150 billion which is over a 100% debt to equity ratio. Last year Toyota generated $20 billion in cash flow, but after paying it's debt and interest

    required, it used the the $20 billion and was still

    $2 billion short in being able to service it's debt

    requirements. This is not a prescription for financial success. GM by comparison has a debt to equity ratio of only 36% and GM has more cash and liquid investments on it's balance sheet than Toyota does even though Toyota's sales volume approaches twice that of GM. If you also go down the line at vital statistics like Return on Equity, etc. GM's financial position is far superior to that of Toyota.

  • Report this Comment On November 26, 2012, at 10:40 AM, TMFMarlowe wrote:

    @marketsurfer, you're making a common error, conflating the numbers for Toyota's financial services unit with its "real", industrial debt. GAAP requires that they be all rolled up together -- look at Ford's and you'll think F has $100 billion in debt -- but the actual debt-as-we-think-of-it-attributable-to-industrial-operations is much lower for both. It's around $14 billion for Ford, a reasonable number. I don't have Toyota's real debt number at hand right now -- I'll try to dig it up when I have more time later -- but it's also reasonable. Toyota's credit rating is AA-minus, last I checked, and its financing arm is healthy. Nothing to see here.

    TL;DR: There are good reasons to argue against buying Toyota, but "crushing debt" isn't one.

    John Rosevear

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