The Risks Facing Toyota

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 like General Motors (NYSE: GM  ) and Ford (NYSE: F  ) . But over the last 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.

The risks of Toyota's stock
As automakers go, Toyota is a fairly low-risk investment. The company's rightly vaunted manufacturing expertise means that its costs are unlikely to ever get out of hand relative to competitors, and its global reputation for quality and value should endure for some time, even if its products start to slip.

One would think that events such as a global quality scandal or a massive tsunami that disrupted worldwide production for months would represent grave risks to a company like Toyota, but in both cases, the automaker simply bounced back to roughly the same market position it had held before.

As with any global automaker in the current environment, competitive pressure remains a huge risk. Toyota is no exception. Volkswagen (NASDAQOTH: VLKAY  ) has declared that it intends to be the global auto sales leader by 2018. Despite decades of troubles, GM remains a mighty competitor – one that has recently shown signs of harnessing its enormous potential. Hyundai (NASDAQOTH: HYMTF  ) and Ford, while somewhat smaller, are both on product-driven upswings and could well steal significant market share from Toyota in places like China.

Toyota's not going anywhere, absent some huge disaster. But an erosion of its perceived global leadership could lead to a long-term decline – both in the company and in its stock.

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.


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  • Report this Comment On November 28, 2012, at 1:48 PM, MARKETSURFER wrote:

    Question: You assert that Toyota's costs will never get out of hand. Why is it that they are carrying over 100% debt to equity of $150 billion dollars ?? They had cash flow of $20 billion last year but it wasn't even enough to service their debt and interest payments. Their leveraged free cash flow was negative $2 billion. This doesn't seem like costs and cash management is under control.

  • Report this Comment On November 28, 2012, at 2:47 PM, TMFMarlowe wrote:

    @marketsurfer, you're making a common error, conflating the numbers for Toyota's financial services unit with its "real", industrial debt. Accounting rules require that they be all rolled up together -- folks who haven't caught on to this consistently scream at me that Ford 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. It'd be a lot lower if the company were choking to death on debt (which it surely would be if it had $150 billion worth -- actually, it probably would have been forced into bankruptcy ages ago).

    Long story short, there's nothing to see here.

    John Rosevear

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