Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 551

Toyota: How the hybrid engine regeared the investment case

The world’s biggest car company is reaping the rewards for a multi-pronged approach to reducing CO2. Here’s why that’s good news for investors.

Toyota has been a long-term holding for us, and it’s been a relatively easy decision to own it. After all, Toyota is:

  • the world’s largest car maker 1
  • the world’s 6th most valuable brand 2
  • the company that in many ways redefined modern manufacturing through just-in-time delivery and its kaizen and kanban production practices.

In late 2023 we began to positively reassess our Toyota position as we discerned some key trends in the battery electric vehicle (BEV) market.

EVs and a range of anxieties

Over the past few years, growth in Electric Vehicle (EV) sales has been staggering. Global sales doubled in 2021. They grew by 60% in 2022 and were up around 30% in 2023.3 But in late 2023 the pace of growth in EV demand began to slow (especially in Europe and the US, much less so in China). More cost-conscious mainstream buyers baulked at high sticker prices, soaring insurance and repair costs, problematic resale values and range anxiety due to inadequate charging infrastructure.

Meanwhile, regulatory backing for EVs became less of a one-way street. In some countries, subsidies have been reduced. In the US, unions and car dealers are pressuring the Biden government to wind back policies that push rapid BEV adoption.

Toyota says “not yet”

The slowdown in EV growth had some interesting implications for Toyota.

While US giants like Ford and GM and European car makers like Volkswagen had made early commitments to a BEV future, Toyota maintained that hybrid vehicles (a technology they invented with the Prius in the late 1990s) offered the most practical pathway to lower emissions.

Chairman and former CEO, Akio Toyoda said one billion people around the world live in areas without electricity. In the case of Toyota, they also supply vehicles to these regions, so a single battery-electric vehicle option cannot provide transportation for everyone and that’s why they are trying to have a variety of options.

Strategically that’s turned into an astute decision.  Demand for hybrids is soaring.

  • In the first nine months of FY2024, Toyota and Lexus retail sales rose 9.7% Year-on-Year (YoY).
  • Sales of their electrified vehicles - mostly hybrids – accelerated 41% YoY) over that period. They now account for 36% of total sales.
  • In Europe, over 60% of Toyota and Lexus sales in FY2023 were hybrids.

Toyota’s shift to hybrids is good for profitability as well as volume. Partly that’s a function of increasing demand. But its famed engineering excellence also means Toyota can now make the more complex hybrid drivetrains much more efficiently.  They now make as much profit on hybrids as on Internal Combustion Engine cars.

The investment case

Toyota could be entering a period of ‘breakout profitability’. In the short-term, the BEV market is crowded and slowing so there’s lots of pressure on BEV companies outside China to cut costs – a trend that’s already hitting Tesla. Positioned as it is, Toyota avoids getting caught up in a margin-cutting BEV price war while at the same time capturing all the benefits of a growing hybrid market through higher volumes, more pricing power and stronger earnings.

While hybrids have been viewed as a ‘transition’ technology, the Toyota view is that many consumers now prefer hybrids – and may continue to do so. As we write, Toyota is trading on a P/E ratio of 10x, only slightly above its long-term averages. Yet it looks poised for sustained growth.


New technologies - and more chargers - could end 'range anxiety' and take EVs mainstream.
Image Source: Adobe

The future is still bright for electric

It’s crucial to note that Toyota is not writing off the BEV market. Even with the recent blip in Europe and America, the case for electric vehicles remains strong. The driver experience is different – and many say better. New European emissions standards due in 2025 may add impetus to European demand.

Perhaps most importantly, car makers are increasingly focused on making more affordable EVs that can appeal to the mainstream driver. BYD in China, for example, is a leader in this effort but other makers are also adapting their approach to both the underlying technologies and the cost profiles of their BEVs.

Toyota is also focused on developing a range of technologies that will make it even more competitive in a world focused on low-carbon transportation.

They aim to produce around 3.5 million BEVs by 2030 but these will be powered by newly-developed bipolar and solid-state battery technology that promise longer range and faster charging. To deliver those new technologies, it is spending the equivalent of US$60bn on electrification through 2030. Toyota is also unwinding its cross shareholdings of other companies and plans to invest the proceeds in electrification.4

For us, the investment case for Toyota now has further improved:

  • It passed the BEV-trend test by sticking to its strengths (hybrids) in a way that met customer needs whilst boosting the bottom line.
  • It’s investing heavily in R&D to make it competitive in a low-carbon world.
  • In its recent third quarter results the company committed to better shareholder returns through higher dividends and buybacks.
  • Its valuation remains reasonable.

Toyota also has an outstanding competitive position. It’s a quality business with strong brand equity. Their cars are highly rated for reliability and have outstanding resale value. That represents good value for the people driving the world’s Camrys and RAV4s. High demand for hybrids also means limited inventories and Toyota pays out lower incentives than the industry average. So it’s good for investors too.


Source: Morningstar.com. End of Date as of Mar 8, 2024.

 

As at February 2024, Toyota is a holding in the Platinum International Fund and the Platinum Japan Fund.

[1] It sold over 9.5 million vehicles in 2023
[2] Source: Interbrand Best Global Brands, 2023
[3] Source: Benchmark Minerals
[4] For more on a new shareholder-friendly culture in Japan see our recent article: Japan’s reform. New dawn or same old story.

 

Leon Rapp is Co-Portfolio Manager, Japan Strategies at Platinum. This information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

For more articles and papers by Platinum click here.

 

banner

Most viewed in recent weeks

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Latest Updates

Economy

Is 'The Great Australian Dream' a sham?

Peter Dutton has made housing a key issue for the next election, pledging to “restore the Australian dream” of home ownership. It got me thinking about what this dream represents, how it originated, and whether it’s still relevant today.

Superannuation

Clime time: Taxing unrealised capital gains – is there a better idea?

The efficacy and fairness of establishing an unrealised gains tax regime will hopefully be hotly debated at the next election. We need better ideas on how to use the strategic and unique benefits of our massive super funds.

Retirement

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Investment strategies

What poker can teach us about investing

So-called ‘resulting’ is what poker players call the tendency to judge a decision based on its outcome rather than its quality. It's something that happens a lot in investing, though should be avoided at all costs.

Latest from Morningstar

Should you buy and hold an Artificial Intelligence portfolio?

For those with the patience to own an investment as volatile as the AI sector, buying and holding a stock basket might make sense. However, based on internet stocks’ history, you need not rush to do so.

Strategy

The bull market in commodities may be just starting

The world is entering a higher cost environment which will hit the profits of companies in many sectors. A key beneficiary will be commodities, where supply shortages are meeting increasing demand from AI and green energy.

Shares

The challenges facing electric vehicles

Slowing demand and profit warnings from the EV manufacturers has seen analysts revise down their EV penetration forecasts. What's behind the slowdown, and are the issues a blip or something more serious?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.