The auto industry is a notoriously challenging place to invest. It is capital intensive, regulated, cyclical, and globally competitive. It's no wonder so many up-and-coming automakers fail or get folded into a larger competitor.
The auto industry as a whole has underperformed the S&P 500 over the last decade. General Motors is up an abysmal 8.1% over the last 10 years, while Ford is down over 20%. Tesla is the U.S.-based standout, while Ferrari is the global standout -- up over 600% in the last decade.
Toyota (TM 0.60%) -- the largest automaker by volume -- has seen its stock quietly gain over 20% in the last three months and nearly 60% in the last year. Its market cap is now over $305 billion, making it the second-most valuable automaker in the world behind Tesla.
Toyota is now one of the few stocks that have outperformed the S&P 500 over the last year, has a higher yield than the S&P 500, and has a lower valuation than the S&P 500. Here's why the dividend stock is still worth buying now, even after its recent run-up.
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Shifting into a new growth gear
Toyota has been playing some level of defense since passing General Motors to become the world's largest automaker by volume in 2008. Over the last 10 years, sales are up just 21.3%. Toyota has faced a slew of competition from fellow Japanese automakers (namely Honda), Korean automakers, and the threat of electrification.
However, Toyota has tapped into something special over the last five years or so. Many automakers witnessed a surge in order volumes and profit margins during the peak of the COVID-19 pandemic as consumers upped their goods spending and lowered their spending on services.
Like many automakers, Toyota witnessed a slowdown in sales and profits following this initial surge. But Toyota's recent performance has caught investors off guard, which is why the stock has rallied so much over the last year.
Toyota's record results
Toyota's trailing-12-month (TTM) revenue and net income are at all-time highs, and its operating margins are 11% -- which may not sound like much, but for Toyota, it's a big deal because the company has such high sales.
TM Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Ferrari, one of the most well-run automakers in the world, has an operating margin of 26.9% -- which makes sense since it is a much lower-volume, niche business. But Ferrari's TTM revenue is just $6.5 billion -- less than 3% of Toyota's.
Tesla used to have the best margins in the industry when it came to high-volume automakers. But Tesla's TTM margin has slumped to just 9.2% due to a mix of cost cuts, slowing demand, ongoing spending on manufacturing expansions, and so forth.
In sum, Toyota is pairing high volume and high margins better than any other automaker in the business. A big reason for that is that Toyota has made product improvements within its wheelhouse, rather than going full-throttle outside its comfort zone, by abandoning its gas-powered past in favor of an electric-motor future.
Toyota's secret sauce
Just as Toyota brilliantly pairs high sales and profitability, it is also carving out a stronghold at the bridge between gas-powered cars and electric vehicles (EVs) -- hybrids.
Hybrid EVs, plug-in hybrids, battery EVs, and fuel cell EVs made up a staggering 35.9% of the company's first-quarter through third-quarter fiscal 2024 Toyota and Lexus sales. But hybrids alone made up 33.5% of Toyota and Lexus sales. Toyota's operating margin during this reporting period was an impressive 12.5%.
Toyota's strategy leans heavily on hybrids over the medium term, but recognizes the importance of investing in EVs for the long term. In June 2023, Toyota unveiled plans for a full battery EV lineup in 2026, expecting 3.5 million battery EV units annually by 2030. For context, Toyota plans to sell 9.45 million vehicles in fiscal 2024.
Toyota is actively putting capital to work and is maintaining strong margins. In October, it announced a new $8 billion investment in Toyota Battery Manufacturing North Carolina -- bringing the total investment to $13.9 billion. Earlier this month, Toyota announced a $1.3 billion investment in its Kentucky facility for future electrification efforts.
In sum, Toyota is one of the few companies capable of thriving in the short term, medium term, and long term, regardless of consumer trends. Toyota will be in good shape if EV adoption is slower than expected. If it accelerates, Toyota will be ready by 2026.
The best overall automaker to buy now
It would be one thing if Toyota stock were priced to perfection -- but that's far from the case.
Toyota sports a mere 10.2 price-to-earnings ratio compared to 26.9 for the S&P 500. It also has a 1.8% dividend yield compared to 1.5% for the S&P 500. Toyota stock is also up 58.3% over the last year and 47.3% over the last three years, whereas the S&P 500 is up 21.4% over the last year and 26.8% over the last three years.
The greatest downside of investing in Toyota is that it operates in a highly cyclical industry -- which may not appeal to all investors. Toyota can be best-in-breed but isn't immune to a slowdown in consumer spending, ongoing high interest rates (which reduce consumer demand), supply chain challenges, the risk of a global recession, or any other uncertainty.
However, Toyota still stands out as the best bet for investors interested in the auto industry and an EV future but through a company that has a more regimented approach to the transition than an all-or-nothing EV play.
