As industry retreated, so did Toyota's stock price

As industry retreated, so did Toyota's stock price

Hans Greimel Automotive News January 28, 2008 - 12:01 am ET Toyota's Watanabe: Toyota will eke out a 1 percent sales gain in North America in 2008.

Something just doesn't add up when you look at Toyota's stock price.

It tumbled nonstop in 2007, losing nearly a quarter of its value.

But at the same time, Toyota was leaping from sales record to sales record and booking record profits. It overtook Ford as the No. 2 automaker in the United States and has pulled virtually even with General Motors in the race for the world sales title.

To assuage investors, the company even raised its midterm dividend by 30 percent.

So what gives?

In 2007, it turns out, Toyota was largely a victim of forces beyond its control: Widespread fear of a U.S. economic slowdown, the yen's rising value against the dollar, a domestic auto market in steep decline, soaring gasoline prices worldwide.

That all spooked investors not only away from Toyota but away from any carmaker with big exposure to the United States or Japan. Like a ship on the ebb tide, Toyota's stock retreated with the industry.

Time to buy?

But lots of financial analysts say that now might be the time to take another look at Toyota shares.

"I think it's all an overreaction," says Tatsuo Yoshida, a Tokyo-based analyst with UBS Warburg. "If you have a longer-term horizon, like a year or more, it's a good time to accumulate."

He sees Toyota's shares rocketing by 80 percent to 8,900 ($83.86) in the next 12 months. Just be wary over the first half-year or so as the U.S. subprime loan problem shakes out, he warns. Toyota sells 35 percent of its cars in North America.

Toyota President Katsuaki Watanabe isn't among the worrywarts.

U.S. slowdown or not, he says, Toyota still will outperform its rivals and eke out a 1 percent sales gain to 2.64 million units in North America in

2008. And the real Toyota bulls say the United States is beside the point. Factor in the rest of the world, and Toyota is forecasting total sales to climb by 5.1 percent to 9.85 million units next year.

The bar goes higher still in 2009, to 10.4 million.

BRIC building

To get there, Toyota's not banking on the United States. Instead, it's salivating over big-time growth potential in the so-called BRIC nations: Brazil, Russia, India and China. In China alone, Toyota thinks it will hit 1 million vehicles a year by the early 2010s. That's up from around 400,000 in

2007.

In fact, analyst Takaki Nakanishi of JPMorgan predicts Toyota will dial down its offerings in stagnating markets like the United States as it turns to tantalizing growth potential elsewhere.

"Japan's automobile industry is set to see a reduction in its reliance on the U.S., which has been the main source of expansion, and embark on its second growth phase as companies achieve globalized earnings structures," he wrote in a report issued this month.

Just look at Suzuki Motor Corp. It ranked fifth worldwide among automakers in the Automotive News/PricewaterhouseCoopers Total Shareholder Return rankings last year, way ahead of its Japanese compatriots. That was largely thanks to Suzuki's unrelenting focus on India.

Yet global conquest raises its own red flags for Toyota.

Skeptics wonder whether the Japanese company can sustain expansion and maintain quality.

New factory

The company just opened a factory in St. Petersburg, Russia, and is planning two more in Woodstock, Ontario, and Blue Springs, Miss. Not only does that raise the specter of overcapacity, but it also could stretch the company's engineering and managerial resources dangerously thin.

Despite the potential quality problems, Koji Endo, an analyst with Credit Suisse in Tokyo, has a "buy" rating on Toyota, with a lofty target of 10,000 ($95.23).

The catch: a three-year time frame. And it's anybody's guess when the buying will begin.

"Personally, I think the downside is very limited," Endo says. "But how cheap is cheap enough, we still don't know."