Are you looking for an undervalued long-term pick you don't need to continually watch? That's actually a tall order these days. Many of the most compelling stocks either don't have an obviously bullish distant future, or they require constant monitoring, or both.
There's a handful of prospects, however, that fit this bill and would also be at home in most people's portfolios. One of the best of these names is hiding in plain sight. That's carmaker Toyota Motor (TM 0.14%), which Wall Street says is more than 30% undervalued where it's priced right now.
Standing up to the headwind
Surprised? It would be a little surprising if you weren't. The brand was a titan within the automobile industry from the 1980s into the 2000s. Then the business changed. Competitors stepped up their games. Cars -- including Toyota's -- began lasting longer, recently reaching a record-breaking average age of 12.6 years in the United States, according to numbers from S&P Global Mobility. The advent of the electric vehicle further disrupted the global automobile market. These are all reasons that Toyota Motor just isn't the head-turner it used to be.
That doesn't necessarily have to be a permanent condition, however. This car company can restore its former stature, and deservedly so. Indeed, it's already doing so. For the fiscal year ending in March, Toyota manufactured a record-breaking 10.3 million cars just to keep up with growing demand. For the three-month stretch ending in June, the automobile giant reported a record-breaking (for that particular quarter of the fiscal year) bottom line of $8.9 billion.
NYSE: TM
Key Data Points
Granted, circumstances helped. The yen is weak, for instance, exaggerating the Japanese company's overseas revenue and earnings. And for many people all over the world, the purchase of a car just can't be postponed any longer.
On balance, though, Toyota's recent performance overcomes more challenges than not. New-car prices remain at sky-high levels, and Toyota doesn't make any purely battery-powered electric vehicles in the United States despite consumer interest in them. Toyota's still heavily invested in traditional combustion engines, in fact -- in the U.S. and abroad -- with only around one-third of its production not being combustion-powered automobiles.
The thing is, in retrospect, being slow to embrace battery-powered automobiles seems to have been the smart choice for Toyota.
Hybrids, not pure EVs, are the actual future
There's no denying that EVs have their place in the automobile landscape. But it's not quite the one initially imagined.
Regarding the logistical and cost-based challenges of owning battery-powered vehicles, a poll recently performed by the NORC Center for Public Affairs Research and the Energy Policy Institute at the University of Chicago suggests that only four out of 10 U.S. drivers are likely to purchase an electric vehicle when they're looking for their next car. In a similar vein, McKinsey reports that 46% of Global EV owners are likely to buy a gas-powered car the next time they're in the market for a new vehicle.
Their chief complaints? Globally, a lack of understanding of how EVs work, and their net-cost of ownership. A lack of driving range and the inability to charge their vehicles at home were also high on the list of drivers' worries.
Against this backdrop, Toyota's commitment to hybrid electric vehicles -- which run on batteries but can also be powered by gasoline -- makes sense. In fact, the company's tentative plans to make and market a hybrid version (and maybe even only a hybrid version) of every single one of its cars within the United States is arguably brilliant. It's a happy-medium option that most consumers can embrace.
And they already are. During the first fiscal quarter ending in June, sales of the hybrid version of Toyota's Camry jumped by nearly 143% year over year, compared to only 18.6% growth in overall Camry sales. That surge follows 2023's 65% uptick in hybrid sales in the United States alone, versus a more modest 46% increase in non-hybrid EV sales. We're seeing the same dynamic overseas as well.
Look for more of the same going forward, too. Market research outfit Prescient and Strategic Intelligence predicts that the global hybrid market is set to grow at an annualized pace of 14.9% through 2030.
It's difficult to imagine a powerhouse brand like Toyota not leading this charge, now that it's mastered the art of making and marketing hybrid vehicles.
Then there's the hydrogen-powered engine Toyota's been developing for years now. It's a potentially cleaner replacement for hybrid powertrains. But, first things first.
Plenty of lasting value
The backdrop is bullish to be sure, but is Toyota stock actually undervalued and ripe for long-term gains? It is.
That's Wall Street's take, anyway. Analysts' current consensus price target stands at $240.81, which is more than 30% better than the stock's present price. The majority of these analysts also consider Toyota stock a strong buy right now, with several of these pros upping their rating in the wake of the stock's pullback from its March peak.
Even without analysts' bullish backing, however, Toyota is an attractive investment here. The stock -- an American Depository Receipt, or ADR, to be more precise -- is priced at just over eight times its forward-looking earnings. That's dirt cheap. The stock's also sporting a forward-looking dividend yield of 2.2%. You can find higher yields. But you won't find them with stocks of a similar risk and long-term growth profile.
So, don't overthink this one. Shares of this terrific car company are down nearly 30% in just the past five months, despite still doing well, and despite every reason to believe its future is at least as bright as its past.
