Shares in Toyota Motor Corp have been battered this year, lagging both global auto peers and a weak Japanese stock market, but analysts are near unanimous that the world's most profitable carmaker is due for a bounce.

Apart from its shares, other performance measures at Toyota have been rising: sales, profits, dividends and even margins are up, despite pricier commodity costs and tougher competition.

So it seems strange that its shares, which value the company at $203 billion, more than Daimler AG and Volkswagen AG combined, has shed 22 percent so far this year.

In recent months, the yen's volatility and worries over U.S. consumer sentiment amid the subprime loan crisis have clobbered investor sentiment in Toyota and its domestic peers, which earn the bulk of their profits in North America.

But auto analysts are quick to point out that among Japan's top three carmakers -- Toyota, Honda Motor Co and Nissan Motor Co -- Toyota has the least exposure to North America, and that its shares have been beaten down too far.

We think strong fundamentals nurtured in Asia and other regions as sources of earnings make the shares look increasingly undervalued, UBS Securities analyst Tatsuo Yoshida said.

There has also been some damage to Toyota's once impeccable reputation for quality and reliability from recalls, but analysts said those concerns were inflated.

Toyota's strategically important quality reputation has recently shown a little tarnish, but management is not one to rest on its laurels, said Christopher Richter, analyst at CLSA Asia-Pacific Markets.

We believe it will overcome this problem, so the current share price weakness looks like an opportunity to buy.


Others think so too.

Of the 20 brokerages surveyed by Reuters Estimates, 18 have a buy or outperform rating on Toyota, and just one with a sell. The median target price from 14 polled is 8,550 yen -- 37 percent above Friday's close.

HSBC auto analyst Seiji Sugiura, who has the sole sell rating, believes the discount makes sense.

Toyota has experienced stellar growth over the past five years, but it faces increased risk. We foresee a rapid slowdown in profit growth for Toyota, compared to rivals, he said.

Sugiura worries that the slowdown in U.S. profit growth due to higher incentives on pickup trucks and a worsening product mix will be repeated in fast-growing emerging markets.

But April-September earnings highlighted Toyota's growing strength in emerging markets such as China, Russia and the Middle East, with popular cars such as the Camry sedan.

Operating profit in North America grew just 1.4 percent in the first half, against a 16 percent jump in overall profit.

Toyota's operating margin is the highest in the global auto sector, at 9.8 percent in the first half, versus 8.6 percent for Honda, Nissan's 7.2 percent and much lower for European rivals.

So why have Toyota's shares slid by a quarter since touching a life-time high in February of 8,350 yen?

Market watchers and participants blame Toyota's heavy weighting -- more than 4 percent of the TOPIX index of first section-listed shares, for part of the fall.

Because of its size, Toyota is an easy target when investors want to go underweight on Japan, or auto stocks, said Goldman Sachs analyst Kota Yuzawa.

Investors eyeing the precarious U.S. car market and currency swings could also be overlooking the longer-term potential.

Even investors with one, three or five-year funds hesitate because they get quarterly report cards, one analyst said. They know Toyota is cheap, but they're only human.

The fall has eroded the premium Toyota used to trade at versus its domestic peers, and the stock now trades at a heavy discount to the broad market -- something Shinichi Haneda, a portfolio manager at AIG Global Investment, said was not justified.

The Japanese auto sector promises stable growth, and it should at least be valued on a par with the TOPIX, he said.

At Friday's close of 6,240 yen, Toyota traded at 11 times projected earnings, compared with more than 17 times for the TOPIX. Honda's price-earnings ratio is 10.7 and Nissan's 10.8.


Overseas rivals have fared far better in the year to date, with loss-riddled General Motors Corp and Ford Motor Co down 6.3 percent and 2.9 percent. In Europe, Volkswagen is up 88 percent and Renault SA up 9 percent, despite strength in the euro eating into export profits.

Japanese car stocks have been dented anew in the past month by the dollar's plunge to a 2-1/2-year low near 107 yen

The dollar has since returned above 110 yen, making Japanese auto stocks due for a rebound, said Lehman Brothers analyst Tsuyoshi Mochimaru, adding that the market just needs a trigger.

That could come in the form of Toyota's projections for 2008 vehicle sales and production, due at its year-end news conference on December 25, he said.

Investors could be in for a jolt earlier if U.S. November car sales are better than previously thought.

Mid-month U.S. data suggests the market could provide a positive surprise in November, despite weak financial markets, said CLSA's Richter.

(Editing by Lincoln Feast)