Toyota Continues to Close In on Big 3

October market share numbers for the domestic automobile industry tell the whole story. For years the Big 3 (GM, Ford, and Chrysler) have commanded the majority of sales in the United States. Once as high as 70%, their combined market share has been falling fairly precipitously in recent years, hitting 55% last month.

More interestingly, however, is the fact that Toyota Motor (TM) is closing in on Chrysler’s number three position in terms of market share. Not only should they surpass Chrysler soon, but Ford’s number two position is also in jeopardy, as seen by the six top sellers:

GM 22%
Ford 17%
Chrysler 16%
Toyota 15%
Honda 10%
Nissan 7%

Investors, after seeing these numbers, will probably want to rush out and buy shares of Toyota Motor (TM). However, does increasing share in the U.S. thanks to superb quality, value, and fuel efficiency, translate into a winning stock price?

As you can see from this chart, TM shares have been on fire recently but still trail the highs set in 2000. After more than doubling in the last two years, investors might want to wait for a pullback before adding TM shares. Although business is good and Toyota is taking share, the car business is still a tough one, and the stock today is pricing in a lot of good news.

Much like Southwest Airlines (LUV) and JetBlue (JBLU), the best companies in extremely competitive industries don’t always shine as much as some might think.

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5 Thoughts on “Toyota Continues to Close In on Big 3

  1. NO DooDahs on November 8, 2005 at 9:31 AM said:

    HMC is a better choice IMO than TM. HMC is a better performer in terms of stock price, and is well above its 2000 highs.

    HMC represents slightly more of a value than TM. PE is lower 11.8 vs 14.1, PS 0.64 vs 0.83, PB 1.65 vs 1.75, PCF 8.70 vs 9.70. Industry numbers are 15.4, 0.23, 1.50, and 2.50, but these are skewed by GM’s huge losses and bankruptcy risk (yes, I said bankruptcy risk, just like CPN). Debt ratios are pretty equal, HMC has edge in DE but TM has edge in Int. Coverage. However, HMC has higher ROE, ROA, and ROC for both the most recent year and for the five-year average. HMC also has a slightly lower PEG than TM, although neither is an outstanding grower at this point. Dividend yields are equivalent at 1.1% or 1.2%.

    I would not necessarily call TM the best company in the industry, I have not done DD for any auto manufacturers but I am a fan of MGA in the parts space. I would like to know your “take” on the smaller players in the auto manufacturing space. Nissan makes exceptional product recently, and there’s about 10-15% of market share below them. The smaller caps have the most opportunity for either growth or acquisition, do they not?

  2. Chad Brand on November 8, 2005 at 1:39 PM said:

    I haven’t done much work on the automobile companies and I don’t own any of them. On the parts side, I do like SUP’s stock price relative to its balance sheet.

    Based on the recent UAW healthcare consessions, a GM bankrupcty in very unlikely in the near-to-intermediate term. I think they realize fewer benefits are better than no benefits, hence they made a $1 billion per year deal.

    Recently, it’s hard to say Toyota has not been the best auto maker, as judged by their market share gains, hybrid car innovations, and momentum in the United States.

    As with the airlines, I just seem to find better stocks to buy than the auto makers, even those that are the winners in the industry.

  3. Chad Brand on November 8, 2005 at 3:43 PM said:

    Also, don’t you think TM trades at a premium because it is regarded as a better company?

  4. NO DooDahs on November 8, 2005 at 4:37 PM said:

    HMC also has market share gains, hybrid car innovations, and U.S. momentum. HMC also has room to grow in the U.S. in the truck and SUV market, whereas TM has already penetrated that market.

    I think that, short a drastic restructuring resulting in halving their U.S. market share, a bankruptcy in GM is inevitable. Will it happen in the next two years? Probably not. But one or the other will happen in the next ten. The risk is very real, but these things happen in super-slo-mo.

    TM may have the perception as the better company and trade at a premium. That doesn’t mean it IS the better company, and that’s my point. It may not be. The title of “best automaker” should probably go to the winner of the TM vs HMC battle, I’ll agree to that. But that still doesn’t make either of them the best automaker investment.

    I don’t believe in buying at a premium, regardless of the perception of others. I buy based on my evaluation. From the limited examination I’ve done of automakers, I would at this moment prefer HMC to TM, but if I had to buy an automaker, I would do DD on the smaller ones first, just in case there was a diamond there.

    I wouldn’t touch the airlines with a ten-foot pole, but YMMV. I would prefer an industrial chem, fertilizer, chicken processor, or copper/molybdenum mine to an airline in today’s market.

  5. NO DooDahs on November 9, 2005 at 7:42 AM said:

    The premium that TM trades at may be responsible for its lackluster stock price performance, relative to HMC.

    See chart 2 at this site.
    TM has the largest increase in U.S. sales, but HMC and Nissan also posted strong increases. The big three dropped 13 points while the Japanese big three gained 7.9 points, from 1990 to 2004. Where are the other 5.1 points? They are probably the better investments.

    HMC has about 31% of the hybrid market, which is much less than TM at 64%. They are pretty much the only competitors, F and GM have hybrids but combine for less than 5% of the market.

    HMC’s hybrid is atop the EPA fuel economy list, some bragging rights.

    Where HMC stands to gain the most ground is by getting tuners interested in the Civic again; and in trucks, where the Pilot and the Ridgeline are new vehicles (Ridgeline is their only pickup in the U.S. and their first in a long time).

    Perhaps TM is the better company, perhaps not. I don’t think TM is the better investment of the two. I still need to DD the rest of the automakers.

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