After General Motors, It's Toyota's Turn to Stumble

Toyota initiates a massive new recall.

Alex Dumortier
Alex Dumortier, CFA
Apr 9, 2014 at 10:15AM

The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) were up 0.09% and 0.15%, respectively, at 10:15 a.m. EDT. The first-quarter earnings season got under way yesterday afternoon with Alcoa's results (which beat Wall Street expectations, incidentally), and The Wall Street Journal reported that "investors are bracing for a raft of weak earnings reports," citing data from FactSet that indicates S&P 500 companies' first-quarter earnings are expected to decline year over year. Oddly, data from S&P Dow Jones Indices shows no such decline; instead, operating earnings per share are expected to rise 7.1%. Top-down estimates of "as reported" EPS imply an even greater increase of 19.3%. Not that any of these figures are set in stone, of course -- they are estimates that are subject to (sometimes massive) error.

In individual company news this morning, Toyota Motor (NYSE:TM) is initiating a massive recall.

I've been banging the drum for long-term, value-oriented investors to look at General Motors (NYSE:GM) in the wake of its massive recall, on the basis that the headline risk is exacting a higher toll on the shares than the probable economic impact of the scandal (see this piece from Tuesday, for example). However, today's news regarding Toyota is a reminder that investing in this type of situation if never without risk.

The world's largest automaker is recalling more than 6 million vehicles worldwide, including among some of its best-selling models such as the Camry sedan and the RAV4 SUV, in order to fix five safety defects. Thankfully, none of the identified issues have been tied to injuries or fatalities, according to the company's statement.

This development is a blow to Toyota's efforts to restore its image for quality in the wake of a 10-million car recall in 2009 and 2010, which was forced by an unintended acceleration danger. Toyota's revenue declined during the recall period (the global economic downturn didn't help matters), but analysts had been forecasting record sales for the fiscal year ending on March 31, 2015.

Shares of Toyota fell 2% yesterday on the New York Stock Exchange and are 1.4% lower this morning. General Motors is also down 2.1% at a.m EDT. Part of this may be due to the shares trading in sympathy with Toyota, but I suspect that it's also due to the fact that Morgan Stanley downgraded GM's stock this morning, saying it no longer sees "significant risk-adjusted upside." The Morgan Stanley report said the stock is already trading at fair value and looks unattractive relative to its peers. Given that General Motors is currently the second-cheapest major automaker in the world, after Fiat, I'll have to disagree with the broker on that last observation. As I concluded on Tuesday: stockpickers -- start your engines!