Toyota Charges into the Future with a Jolt from Electric Sales

Toyota Charges into the Future with a Jolt from Electric Sales

Price $180.65                          Core Holding                        June 11, 2021

  • Diverse plans for the future of traditional and green vehicles.
  • Fantastic financial health and a history of innovative consumer success.
  • Plans spanning decades involving environmental and manufacturing pledges.
  • Massive product depth and reach, with brand recognition spanning the entire globe.

Investment Thesis

Toyota has long been at the forefront of vehicle development, offering one of the first-ever electric vehicles, and the first-ever commercially successful hybrid. Couple this with one of the largest and most successful brands on the planet and you have a recipe for success far into the future. They have lofty goals and plans spanning into the 2050s, but based on previous success and good management, we think that these goals are more than achievable.

Safety

The World Health Organization estimates that auto vehicle accidents could become the 7th leading cause of death globally, and Toyota has a pledge of reaching zero deaths. Their primary method of achieving this is their self-driving technology, to which they have already acquired Lyft’s self-driving division, and extensive passive safety measures (think, airbags, and better construction). Their self-driving plan is slightly different than your average manufacturer, they are focusing on a “companion” model not fully giving the computer control (for the moment), and instead, having it act as a co-pilot for the driver to ensure maximum safety.

Environmental

Toyota has been pouring R&D money into environmental concerns since the 90s, and it has paid off for them massively. They were the first to launch an electric vehicle in 1996, which was not commercially successful.

However, this knowledge directly led to innovations in every single component in the vehicle, from the smallest transistor to the materials that make up the frame of the vehicle.
Not even a year later they debut the Prius – the first-ever hybrid vehicle to reach commercial success. This showed Toyota that there was a market for environmentally-friendly vehicles. Even if you have the best technology, if it isn’t widely chosen by customers: it won’t reduce emissions meaningfully. The Prius sure has reduced emissions meaningfully, it has directly led to the reduction of 140 million tons of carbon over the last 20 years, which is equivalent to 1.5 million fewer vehicles on the road per year.

Toyota Sustainability Book

Toyota’s strategy of a wide breadth of green vehicles also includes hydrogen fuel cell vehicles – they were also the first to market a vehicle with a hydrogen fuel cell. Their newest model of hydrogen vehicle rivals that of standard combustion or electric vehicle, with 402 miles of range. Unfortunately, the hydrogen market is not as viable at the moment, as there are not many hydrogens refueling stations. In places where it is though, they hope to increase the share of hydrogen vehicles with a complimentary fuel program, where Toyota offers 6 years of free refuels or $15,000 – whatever comes first.

Toyota recognizes that even with new green vehicles on the road – there are still 1.4 billion that are not and it wants to work over the next 10-15 years to reduce that amount with various incentives. With all of that being said, they have 55 models of affordable green vehicles in all of their markets, and they pledge to introduce 15 more by 2025 to further bolster this catalog. They expect a 30% yearly increase in electric vehicle sales alone.

Management Strategy

Toyota’s management strategy has always been slightly conservative, but not afraid of advances in technology. They operate on a system of “customer first, dealer second, manufacturer third”. In this way, even at the cost of short-term gains, they maintain customer satisfaction and retain customers. All management-level employees undergo training in their specific regions, to ensure that there are no cultural differences that affect manager understanding. This is to make sure that customer experience is consistent from their flagships in Japan to the most remote of dealerships.

During recalls, such as the one in 2009, Toyota has committed to full recalls of potentially defective parts – even if it is not financially viable. In 2009, though findings did not support a recall at the scale they committed to, they wanted to ensure their brand was minimally damaged and customer confidence was maintained.

As previously discussed, Toyota recognizes that jumping headfirst into green energy is not viable if there is not wide consumer adoption, so they remain focused on increasing the efficiency of current fuel vehicles while also encouraging wider adoption of green vehicles. They estimate that a full transfer to green-only vehicles will be viable by the early 2030s, as by that time they predict most of the world will have adopted green vehicles on a wide scale.

Antero Mainstream wants to reduce its operating leverage, which is already below its peers in midstream companies. They are currently at about 3.7x, want to be under 3x by 2025, which they plan to reach by increased expansion to their access to wells. Its affiliate, Antero Resources, has direct control over 2,000 undeveloped but “premium” locations, and a recent partnership with Quantum Energy for further expansion. 

Production

With the switch to more and more electric vehicles, there needs to be an expansion of battery production. Currently, Toyota manufactures 6-gigawatt hours (GWh) per year, but to meet the demand and their targets, they will need to hit 180 GWh/year by 2030. This is 30x their last 20 years of output in the next 10 years. They are considering expanding battery production to be local to meet demand, such as in the United States, which will be one of the largest battery markets. Toyota already has a wide history of investment in the US, recently beating its 5-year goals in only 4. Additionally, they will need to be able to source materials that are becoming increasingly rare – such as semi-conductors which recently impacted markets with a shortage. However, Toyota managed to avoid this hit entirely, as they work closely with their supply chain to reduce disruptions. In the 5-year investment horizon, it seems like Toyota might be out of the woods.

Image: “Toyota Solidifies Its Substantial and Growing Investment in the U.S.”

Risk

Despite their low financial risk, there is still some risk involved with environmental factors and perception factors. A serious recall could damage brand identity and sales. A similar event to Coronavirus is not out of the question for the future, and obviously, that negatively impacts sales.

Metrics

Toyota experienced a minor shock during the first half of the Coronavirus – much like other automakers. Toyota experienced a total sales drop of about 15% across all its brands and products. Promisingly though, they experienced a significant recovery in the second half of 2020, with a 12.3% year-over-year increase in electric sales. They estimate this will jump to 30% in the following few years, with 12-13% sales growth for all vehicles.Antero Midstream has a dividend yield of about 9%, with some fluctuation. This is above average for the energy sector and midstream corporate pipeline industry. The dividend is easily covered even after capital expenditures used to fund expansion. These expansions are expected to net them ~15% in return on invested capital, which will likely be transferred to the shareholders in the form of dividend increases.

Trailing 12 months

Toyota

General Motors

Ford

Tesla

Volkswagen

Honda

Price-to-Sales

1.01

0.72

0.47

15.99

0.65

0.47

Market Cap (Billions $)

294.5

89.2

60.9

584.6

165.0

59.6

Sales (Millions $)

256,718

122,250

129,052

35,940

268,650

124,239

 

They have a healthier profit margin than competitors, but, have a lower overall margin – which is likely because of how much money Toyota puts into R&D. Couple this with a very solid earnings-per-share and an incredible price-to-sales, and you have a fantastic long-term outlook with one of the best-managed companies in the world. We own it and would buy it here if we did not.

Toyota (TM)

E2021

E2022

E2023

Price-to-Sales

1.21

1.10

1.03

Price-to-Earnings

18.1

15.1

9.5

EV/EBITDA

15

13

11