Toyota Motor Corporation (TM +0.67%) is a global auto manufacturer based in Japan, manufacturing popular vehicles such as the Camry, Tacoma, and Rav4. Over the past five years, net revenues have increased from $226.97 billion in 2015 to $272.75 billion in 2019 -- a compound annual growth rate (CAGR) of 3.74%.
Forecasting a company's growth over a five-year period is difficult in most cases; however, Toyota is providing consistent revenue growth and investing heavily in targeted sales regions -- giving us a bigger window to view the future of the company. Looking beyond the impact from the coronavirus, let's see how Toyota will continue growing during the next five years.
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A larger footprint in North America
As 48% of production but only 24.8% of sales were in Japan during 2019, Toyota has decided to invest in North America -- the largest sales region (30.6%) for Toyota in 2019.
Toyota announced in January 2017 that the company will invest $10 billion in the United States from 2017 to 2021 -- with an announcement in March 2019 to increase the investment $3 billion, for a $13 billion total investment in the United States by 2021. The purpose of this investment is to upgrade current plants under operation and build fuel-efficient models. Toyota currently operates in eight states, with 10 plants in production.
Additionally, Toyota announced in 2019 a partnership with Mazda with a joint investment of $1.6 billion to build a plant in Huntsville, Alabama. The Huntsville plant will be Toyota's 11th in North America, producing 300,000 units annually, and is expected to be fully operational by the end of 2021.
In January 2020, Toyota announced that production of the Tacoma -- a historically popular mid-sized pickup for Toyota -- will be moving to Mexico from the plant in Texas. This announcement was directly after President Trump signed the United States-Mexico-Canada Agreement, which increases the percentage of automakers selling automobiles within the United States to acquire parts to assemble the vehicles from 62.5% from NAFTA to 75%. Toyota's decision to move Tacoma production to Mexico is a profitability decision in the long-term, as Toyota projects domestic production to fall 5.3% in 2020. As the operating margin is flat year over year at 8.7% per the recent quarter, an increased focus on profitability will be a high priority for Toyota as sales projections are expected to fall and economic uncertainty to continue in the near term.
Driving change
In its recent 2019 corporate governance report, Toyota stated that "as the automotive industry enters into a phase of revolutionary evolution at an unprecedented pace, Toyota has decided to focus efforts toward fostering innovation to open the way to the future." The push toward innovation involves the adoption of artificial intelligence, evolving with customer demands, and eliminating carbon emissions by 2050 -- a plan set by Toyota in 2018.
Toyota started the Toyota Research Institute in 2015 with a $1 billion investment based in North America. The purpose of this investment was to increase the artificial intelligence (AI) integration within vehicles, in addition to creating new vehicles with a better focus on AI. In 2019, Toyota announced the investment of $2.8 billion into the Tokyo-based Toyota Research Institute-Advanced Development (TRI-AD), with the intent to develop a self-driving car.
An example of the innovation-driven from these two investments is the newly announced concept car, "Concept-i." The Concept-i uses artificial intelligence to read the driver's facial expressions for commands and uses air cushions built within the seats to wake the driver when he or she is falling asleep or to keep the driver relaxed, enhancing the convenience of driving and proving that Toyota is headed in a technology-focused direction.
Toyota's focus on all-electric cars is large, with plans to receive half of all sales from electric vehicles by 2025. This is a seemingly large hurdle for an auto manufacturer with not one all-electric vehicle currently on the market. Toyota stated during the 2019 Geneva auto show that battery production is a hindrance for Toyota currently, with a current production capacity of 28,000 electric cars annually, however, Toyota announced a partnership with Panasonic in 2019 to produce batteries for electric vehicles -- paving the road to an all-electric lineup for Toyota.
Toyota continues to drive growth
Shares of Toyota are trading at a forward price-to-earnings ratio of 8.78 -- which is higher than Ford's 6.71 and General Motors' 5.04, however, Toyota's earnings per share (EPS) growth of 33.23% year over year outpaces Ford's loss of 98.91% and General Motors' loss of 18.10% -- giving reason to the higher multiple. Continued innovation and heavy investments in all-electric vehicles paired with an increased focus on costs set Toyota apart from the competition, however, competitors ahead of the all-electric market such as Tesla put pressure on Toyota and the competition to step on the accelerator and innovate to meet customer demands.
Investors looking for substantial revenue growth need to look elsewhere; however, owning Toyota is a good bet on the "revolutionary evolution" -- as Toyota stated during 2019 -- of the automobile transition to fully electric and possibly autonomous driving in the future. Continuing to innovate and focus sales on successful regions such as North America will keep Toyota relevant for the next five years, making this auto manufacturer a compelling company to own over the long term.
