Toyota Motor Corp stock has experienced a significant rally this year, outperforming the broader market with an 18% increase compared to the S&P 500’s 9% rise. This upward trend can be attributed to various factors including the performance of the Japanese stock market as a whole, driven by corporate governance reforms and a focus on shareholder returns. Additionally, easing commodity prices and supply chain issues have benefited automotive stocks, with Toyota seeing a surge in operating profit in Q4 FY’24 due in part to a weaker yen making their products more competitive globally.
Furthermore, the slowdown in demand growth for electric vehicles has been favorable for Toyota, as consumers are turning to the company’s hybrid models which offer greater fuel efficiency without the range limitations of EVs. Toyota’s electrified vehicle sales, primarily consisting of hybrids, increased by 35% in the fiscal year ending March 31, 2024, now accounting for 37.4% of the company’s total sales. This shift in consumer preference towards hybrids has also contributed to the positive performance of Toyota’s stock.
Despite Toyota’s stock showing strong gains, with a 40% increase from early 2021 to around $220 currently, the trajectory has not been consistent. Returns were 20% in 2021, -26% in 2022, and 34% in 2023, underperforming the S&P 500 in 2021 and 2022. The Trefis High Quality Portfolio, consisting of a group of stocks, has consistently outperformed the S&P 500 during this period, hinting at the challenges faced by individual stocks in beating the benchmark index. The uncertain macroeconomic environment with high oil prices and interest rates poses a question of whether Toyota may face a similar underperformance in the near future.
Looking ahead, Toyota’s near-term outlook remains mixed for FY’25, with projected profit declines of 28% to 3.570 trillion yen ($229 billion) due to higher material prices, labor costs, and increased research and development expenses. Revenue growth is also expected to slow to around 2% as the global economy cools. Despite these challenges, Toyota stock is valued at approximately 10x forward earnings, which is considered reasonable given its strengths in hybrid vehicles and higher margins compared to other mass market manufacturers. A valuation of $248 per share, 15% above the current market price, suggests potential upside for investors.
Overall, the performance of Toyota stock reflects the broader trends in the automotive industry, with a shift towards hybrid models and away from electric vehicles impacting demand and market dynamics. While challenges lie ahead for Toyota in terms of rising costs and potentially slower revenue growth, the company’s position in the market and valuation metrics indicate a potential buying opportunity for investors looking for long-term growth potential. The evolving landscape of the automotive industry and global economy will likely continue to influence Toyota’s stock performance in the coming months.
