Financial Trends Toyota suffered its worst downturn in its 72-year history during the fiscal year 2009. As stated in Toyota's 2009 annual report, "The world economy declined abruptly in the year ended March 31, 2009 (fiscal 2009), as the worsening of the real economy spread beyond Europe and the United States to emerging countries, reflecting the severe impact of the global financial crisis. (Toyota, 2009)" Due to this unprecedented downturn, combined with the credit crunch, Toyota's sales fell approximated $53.4 billion in 2009.
The weaker outlook highlights an increasingly difficult environment for global automakers that face a softening demand in the United States and Western Europe, especially for higher priced, gas-thirsty vehicles. The decline is illustrated in the following three charts.
Sales:
Sales Growth Rate:
Five-Year Ratio Analysis compared against Ford Motor Corporation.
The automotive industry has changed radically in recent years, and the consequences of failing to manage value can be severe. Benchmarking can determine what is achievable, identify constraints and limitations, improve processes and operations, and make companies more competitive.
Toyota's top competitors include Honda Motor LTD., General Motors Corporation, and Ford Motor Corporation (Yahoo! Finance). Due to the many similarities with Toyota and its recent success Ford was selected as a company to benchmark against Toyota. The next four charts will compare key financial ratios between Toyota to Ford.
Return on Assets (ROA) comparison between Toyota and Ford:
ROA is an indicator of how profitable a company is relative to its total assets. In addition, ROA gauges how efficient management is at using its assets to generate earnings. As shown in the chart Toyota has outperformed Ford during each of the five year being analyzed.
Current Ratio comparison between Toyota and Ford:
Current ratio is a balance-sheet financial performance measure of a company's liquidity. A current ratio of more than 1 indicates that a company's current assets exceed its current liabilities. As show by the ratios in the chart, Toyota's current asset is approximately equal to its current liabilities. Whereas Ford's current assets is equal to approximately half of its current liabilities. Again Toyota has the more favorable ratio between the two companies.
Debt to assets between Toyota and Ford:
The debt to asset ratio shows the proportion of a company's assets which are financed through debt. If the ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's assets are financed through debt. Companies with high debt to asset ratios are said to be "highly leveraged," and could be in danger if creditors start to demand repayment of debt. Toyota has lower and more favorable ratio between the two companies.
Total Asset Turnover comparison between Toyota and Ford:
Total asset turnover measures a firm's effectiveness at using its assets in generating sales, the higher the number the better. Companies with low profit margins typically tend to have high asset turnover, while those with high profit margins typically tend to have low asset turnover. Toyota holds a slight edge over Ford in this category.
D. Earnings Forecast
Net Income Forecast:
On February 4, 2010, Toyota announced its third quarter results. In addition, Toyota predicted it will post net income of $862 million for the year ending March 31, 2010. The company will report its full-year earnings on May 11, 2010.
Although net income is still down significantly from previous years the company is expected to avoid losses in two consecutive years. However, this remain to be seen as revenue estimates are often optimistic and often revised.
Earnings Per Share Forecast:
Analyst from yahoo.com and Reuters are predicting the 2010 EPS to be $1.11, which is a turnaround from the prior year loss. These estimates are likely assuming that the industry is recovering from the downturn in 2009. In addition, that Toyota restores consumer confidence and puts the recall debacle behind it in a relatively quick manner.
V. Recommendations.
A. Public Image.
On February 9, 2010, President Toyoda issued a statement that Toyota has launched a top-to-bottom review of its global operations to ensure that it not only meet but exceed the highest safety standards. The company has formed a task force comprised of the internal and external experts to independently review its operations and make sure that the company eliminated any deficiencies in its processes. The findings of these experts will be made available to the public, in addition to Toyota's responses to these findings. The company plans to more aggressively investigate complaints from consumers and move more quickly to address any safety issues it identify and sharing information across its global operations
This is an excellent start to rebuild the company's public image. These inadequacies contributed to the current situation. In addition, to these actions it is recommended that the company also acknowledge and apologize for all perceived mistakes, confront each negative rumor immediately, and improve dealer relationship. Toyota should also offer as many interviews or television appearances as possible. It should remind the public that most auto manufactures have experienced these similar problems and that statically Toyotas are among the safest and reliable cars on the market.
VI. Stock and Investment Evaluation.
Toyota's Price Action Chart
Company Investment Evaluation (Buy, Sell or Hold)
Evaluating a company for possible investment opportunities depends on many factors such as the investor's risk tolerance, expected returns, and time horizon. Fundamental and quantitative analysis are often used by analysts to make investment recommendations.
Below are some of the recommendations from the major institution regarding Toyota's stock:
Standard and Poors - Hold (Standards & Poors, 2010)
Reuters - Underperform (Reuters , 2010)
Bank of America Merrill Lynch - Buy (Sugimoto, 2010)
Utilizing a passive investment strategy in which an investor buys and hold stocks for an extended period of time, regardless of fluctuations in the market, purchasing Toyota stock is recommended at this time. Over the last five year period Toyota's average stock price was $95.30. This is approximately 21% higher than the average stock price for month of April 2010 ($78.99). This is due partially to the economic conditions and recent scandals.
Ford's Price Action Chart
Source: (Yahoo! Finance)
Ford's Investment Evaluation (Buy, Sell or Hold)
Below are some of the recommendations from the major institution regarding the purchase of Ford's stock:
Standard and Poors - Hold (Standards & Poors, 2010)
Reuters - Underperform (Reuters , 2010)
Bank of America Merrill Lynch - Buy (John Murphy, 2010)
During this five year period Ford's average stock price was $7.35. This is approximately 81% lower than average stock price for month of April 2010 ($13.34). Ford was the only Detroit automaker to avoid bankruptcy. The company was able to accomplish this by borrowing to fund its recent turnaround. The company has a healthy $22 billion in cash in its automotive operations but also has $31 billion in debt. That's nearly twice as much debt as GM had before it filed for bankruptcy. Fortunately Ford has been able to sell new stock, and use the proceeds to pay down debt. Based on the price action chart above holding Ford stock is recommended at this time.
