Is It Time to Hit the Brakes on Toyota?

Between the economic recovery and the aging of the average car on U.S. roads, it's a good time to get into auto stocks. If sales are any indicator, everybody's in the market for a new car – and Toyota's (NYSE: TM  ) capitalized with growth.

Japan's leading automaker capped off its first quarter with U.S. year-over-year sales growth of 1% in March. For the entire quarter, Toyota grew sales year over year by 8.7%, delivering more than 500,000 vehicles into the hands of consumers.

Despite the overall gains, however, not every model in Toyota's fleet has sold well over the beginning of 2013. With rivals in the auto industry eager to take a bite out of Toyota's strength, is this company facing trouble in the U.S. market it can't afford to lose its position in?

The problem with the Camry
Toyota's not in real danger in the U.S. just yet. Its Toyota, Lexus, and Scion brands combined to rank as the No. 1 retailer in March, beating out faster-growing sales from rivals such as Ford (NYSE: F  ) .

But are cracks showing in this top titan's armor? The company's core Toyota division – maker of Toyota-branded and Scion vehicles – saw sales fall 0.5% in March and posted only 2.9% growth through the first quarter. Cars such as the Corolla managed to stave off losses: Corolla sales picked up by more than 11% in March and more than 17% over the first quarter. The Avalon has also done well, although it sells far fewer vehicles than the company's top brands.

So what's holding Toyota back? Look at the old reliable vehicles: Sales of the steady Camry haven't held their own in 2013. The sedan lost more than 4% in first-quarter, year-over-year sales, and more than a whopping 11% in March. The Prius, Toyota's third-leading U.S. seller, has lost ground too, but the Camry's the most trend of most concern. The vehicle is Toyota's top seller in the U.S. by a big margin, outselling the next-best-selling Corolla by more than 20,000 vehicles in the first quarter. If sales of the Camry keep slipping, this company – and stock – could be in trouble.

CEO Jim Lentz predicts his company will sell more Camrys in 2013 than last year, but that might not be enough to reverse Toyota's fortunes in this market. As fellow Motley Fool contributor John Rosevear points out, Ford's Fusion sedan is snapping up sales and threatens to carve into the Camry's niche in the midsize market. Lentz even admitted that the Camry will likely lose market share to rivals this year as the midsize industry grows, and Ford's well-positioned in its recent growth to pose a significant threat to Toyota's place in the U.S. auto industry.

A future in flux
So should you kill your faith in the world's top automaker? Not quite yet.

Certainly Toyota's facing other problems than just the decline in U.S. sales for two of its three best-selling vehicles. China's a huge headache for this company: The ongoing political strife between China and Japan has hurt Toyota's position in the world's second-largest economy. Rival General Motors (NYSE: GM  ) has taken a solid lead as the top automaker in China, and with political tension in the Pacific unlikely to go away any time soon, it'll take a minor miracle for Toyota to catch up with its American rival.

However, Japan's export-friendly monetary moves since new prime minister Shinzo Abe took office should help Toyota's overseas ambitions. The weakening of the yen against the U.S. dollar – something that shouldn't slow down any time soon, considering Abe's pledge to turn around Japan's sluggish economy and reach 2% inflation – will make Toyota's American efforts all the more valuable and should help the company stave off losing too much market share.

Fortunately, Toyota's still seeing strong growth in vehicles outside its best-selling sedans. Sales of Lexus cars jumped by more than 13% in March and have climbed by nearly 18% in 2013 so far. Meanwhile, Toyota's pickups have also done well: The strong-selling Tacoma, Toyota's fifth-best-selling vehicle overall, has grown sales by nearly 23% in 2013, while the Tacoma also posted double-digit sales growth in the first quarter.

Still, it's not enough for this automaker to sit patiently and hope rivals slip up. Japan's inflationary drive will help Toyota battle American rivals such as Ford and GM in the U.S., but if the Camry and Prius can't turn things around, it could be a long year for Toyota. There's no reason to abandon this sturdy automaker just yet, but keep an eye on monthly sales. They'll show just how well Toyota's coping with tough competition.

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Read/Post Comments (10) | 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 April 03, 2013, at 3:15 PM, jeyebolt wrote:

    Facts Toyota is way over valued because of the YEN Manipulation and they don't get the negative press on their sales. But they sure got the Hype in 2012. It turn out to be the Recall King that Consumer Report Ignored.

    TOKYO-Japanese auto sales declined for the seventh straight month in

    March as the expiration of government subsidies for purchases of

    fuel-efficient cars hurt demand.

    Toyota Motor Corp.'s declined 16% to 189,152 vehicles.

    China March sales

    April 1 (Reuters) - Toyota Motor Corp and its joint ventures in China

    sold 75,900 vehicles in the country in March, down 11.7 percent from a year

    earlier, the Japanese automaker said on Monday. Toyota sold 184,700 vehicles

    in China in January-March, down 12.7 percent from the same period a year

    earlier, it said in a text message to reporters.

    Now GM sales March in China

    Its March sales rose 10.7% to 257,944 vehicles and first-quarter sales

    rose 8.7% to 745,152 vehicles, its best quarter ever in China.

  • Report this Comment On April 03, 2013, at 3:53 PM, spawn44 wrote:

    The Japanese autos took advantage of the gasoline price increases and the sleeping U.S. autos to capture market share in the U.S. during the past few decades. That has now changed. The sleeping giants have awoken and it will be the Japanese autos that take the brunt of the force of this change. The handwriting has been on the wall for some time.

  • Report this Comment On April 03, 2013, at 5:04 PM, autoenthusiast wrote:

    This article fails to mention a very crusical point. In 2012 Toyota sharply increased deliveries of the then all new Camry (and the brand new Prius line) due to pent-up demand as a result of the low inventory levels caused by the 2011 tsunami and floods in Thailand. This year's sales results are thus being compared to strong sales months last year.

    Furthermore this article also fails to mention that Toyota is offering much smaller incentives than their American counterparts while also selling far less vehicles to fleets (both of these facts have helped the Fusion increase sales while still trailing the Camry by a wide margin).

    Now that the Yen is valued closer to where it should be (the Yen was artifically strong due to the manipulation of the dollar because of the multiple quantitative easing policies of the US) Toyota will have more flexibility to offer more competitive incentives to keep up with the enormous incentives the competition has been offering in hopes of catching up with Toyota.

  • Report this Comment On April 03, 2013, at 5:36 PM, JudithTruthsayer wrote:

    Toyota used to make affordable and durable cars that were FUN: the Celica, Celica convertible, Paseo, MR-2, and Supra - and even some hot Corollas at one time. Now the ultra-conservatives at Toyota give us the most boring, obsolete cars in the world the Camry, Avalon, Prius, and new Corolla. So what is their solution? Send Scion - which is already the brand for children of the well-off - further upmarket. Makes me sick.

  • Report this Comment On April 03, 2013, at 5:39 PM, NineD930thTA wrote:

    Auto enthusiast Toyota has been offering massive rebates to sell their products. GM has 0% financing for 60 months on their trucks only. Toyota has it on the Camry Corolla, and a few other vehicles they sell. 0% is a huge rebate incentive. Ford yes is offering huge rebates to move the Fusion, but dont think Toyota doesnt offer rebates as well because they do.

  • Report this Comment On April 03, 2013, at 5:40 PM, JudithTruthsayer wrote:

    BTW, despite the fact that Kia lied about their gas mileage ratings, I would buy one over a Toyota in a second. Great prices, improved engineering, proven durability, and amazing styling - KIA is the new Toyota of the 1970s. Watch them grow!

  • Report this Comment On April 03, 2013, at 5:43 PM, MARKETSURFER wrote:

    Toyota currently has debt of $166 billion. It has a levered free cash flow of negative $8 billion. Toyota generated about $31 billion in cash flow in the last year but it's levered free cash flow after payment of

    debt and interest is negative $8 billion. Toyota is not even generating enough cash to cover it's debt and interest payments due. Doesn't sound like a healthy financial condition to me.

  • Report this Comment On April 03, 2013, at 5:48 PM, autoenthusiast wrote:

    nined, Camry incentives are still far lower than the competition. The Fusion for instance has cheaper lease deals despite weaker resale values.

    market surfer, Toyota has one of the lowest debt levels of any automaker and finances most factories and R&D with cash as opposed to borrowing like other automakers do. They also have lower pension liabilities than their competitors.

    Judith, drive a Kia or Hyundai with 100K miles back to back with a Toyota with 100K miles and then tell us what you think.

  • Report this Comment On April 03, 2013, at 6:01 PM, JudithTruthsayer wrote:

    Around 1990, Toyota used an unstable dollar/yen situation to send their parts prices through the roof - they actually apporached Mercedes Benz prices... and then they never went back. Combine that with their greedy, deceitful dealers ("Land of the $650 Front Wheel Bearing." I've sat in their waiting rooms and watched old lady after young lady be told "Yes, your thirty-thousand-mile Corolla needed a timing belt... and let us tell you about how you now should get a $750 gasket set..."), and you have a car that had BETTER last without repairs for 200,000 miles because you NEVER, EVER want to visit a thieving Toyota dealer!

  • Report this Comment On April 03, 2013, at 6:13 PM, MARKETSURFER wrote:

    Dear Autoenthusiast,

    Toyota has I believe the highest debt levels of any automaker. Look it up. I was quoting the current figures from "Key Statistics" on Toyota on the Yahoo Finance website. GM has less than one tenth of the absolute debt level that Toyota has. Look it up. Ford has on first glance a high debt level but most of that debt is attributable to their finance arm which generates between $1 billion and $2 billion in profits each year for Ford, so it is actually productive debt.

    Toyota is hocked up to their eyeballs.

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