Toyota Motor Corporation (NYSE:TM) is the world’s largest automobile manufacturer by volume. With shares trading around $85.88, is TM an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalysts for the Stock’s Movement

The major news event affecting Toyota this year is an ongoing territory dispute between China and Japan that resulted in tremendous sales and production cuts. Anti-Japanese sentiment in many parts of China led to demonstrations against the automaker and other Japanese companies.

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Chinese sales in September dropped 49 percent, followed by a 44 percent sales drop in October, and a 22 percent sales drop in November. Sales in China for the first 11 months of the year were down 3.3 percent to 749,600 units, a far cry from the 1 million target level established toward the beginning of the year.

Chinese deliveries in the July-September quarter dropped a record 23 percent.

T = Technicals on the Stock Chart are Strong

The stock price was recently 1.54 percent above its 20-day simple moving average, or SMA; 6.75 percent above its 50-day SMA; and 7.25 percent above its 200-day SMA.

Since the beginning of 2012 the stock price has been in a fairly pronounced upward trend, rising 29.87 percent this year to date and 29.16 percent year over year.

As a benchmark, the S&P 500 has risen 12.87 percent year-to-date, and has risen 15.80 percent year-over-year.

For comparison, General Motors Company (NYSE:GM) has risen 21.76 percent, Ford Motor Co. (NYSE:F) has risen 3.05 percent, and Honda Motor Co., Ltd. (NYSE:HMC) has risen 7.12 percent this year to date.

E = Earnings are Solid

Toyota’s yearly revenues are a pretty clear reflection of the hardships the company has faced over the past few years. Revenues fell over 20 percent between 2008 and 2009 during the financial crisis, and fell another 2.5 percent between 2009 and 2010. Toyota managed to grow revenues 12.1 percent between 2010 and 2011 while managing damage from the massive tsunami that hit the country that year. Revenues fell 1 percent in 2012.

Fiscal Year

2008

2009

2010

2011

2012

Revenue ($) in millions

262,390

209,000

203,690

228,430

226,110

Diluted EPS ($)

10.78

(2.84)

1.44

3.14

2.20

 

Earnings per share grew 118 percent between 2010 and 2011, before dropping about 30 percent in 2012.

On a quarterly basis, revenues have grown 16.7 percent year over year, with three consecutive periods of growth.

Quarter

Sep. 30, 2011

Dec. 31, 2011

Mar. 31, 2012

Jun. 30, 2012

Sep. 30, 2012

Revenue ($) in millions

59,680

62,580

61,210

69,370

69,680

Diluted EPS ($)

0.66

0.66

0.871

2.32

2.10

 

E = Excellent Mediocre Performance Relative to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is performing. Unfortunately, Toyota’s operational performance is currently lagging behind its major competitors. Toyota has an ROE of 7.23 percent, which compares to Honda at 7.67 percent, GM at 13.53 percent, and Ford, which currently has a whopping 142.46 percent ROE.

Operating margins are also critical for stock evaluation. Toyota is the best among its peer group on this metric with an operating margin of 5.04 percent. This compares to Honda at 4.78 percent, GM at 3.26 percent, and Ford at 4.85 percent.

T = Trends Support the Industry in which the Company Operates

Short-term trends indicate continued sales problems in China. The saving grace with this situation is that Toyota only generates about 12 percent of its sales from China, and has been able to grow quarterly global net profit despite the sales slump.

Critically, the company has been performing well in North America, its largest market. Toyota’s November U.S. sales were up over 17 percent year over year. This follows a 15.8 percent year-over-year sales jump in October, and a tremendous 41.5 percent year-over-year sales jump in September.

As of November, Toyota claimed 14.2 percent of the U.S. market share , a 1.1 percent increase year over year. This puts it in third place, with GM in first with 16.4 percent, and Ford in second with 15.2 percent. Chrysler is a distant fourth at 10.7 percent.

Conclusion

Toyota was the world’s largest car maker from 2008 to 2010, and with 7.4 million sales in the first 9 months of 2012, it’s set to take back that crown. The company managed to grow its sales tremendously without deep earnings cuts, an impressive feat given global economic headwinds.

As the largest auto maker in the world, Toyota looks ready to OUTPERFORM in the long term as economic conditions improve. Another saving grace for the Japanese automaker is its limited exposure to Europe (11 percent of revenue), which has allowed it to avoid the massive losses that Ford and GM have incurred from the region.

 

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