CA - Why Investors Should Sell Tesla And Buy Toyota Instead

2024-01-18 13:19:22 ET

Summary

• Toyota is emerging as a strong competitor to Tesla in the EV market, with booming sales and aggressive EV plans.
• Toyota has several advantages over Tesla in the US market, including a well-established dealer network, a CEO who avoids controversial headlines, and higher reliability ratings.
• Toyota's margins and earnings are rising, while Tesla's margins and earnings are falling, making Toyota an undervalued investment option compared to Tesla.
• Bottom line: Sell Tesla, Buy Toyota.

Most of you probably know that BYD Company Limited ( BYDDY ) ( BYDDF ) recently dethroned Tesla, Inc. ( TSLA ) as the largest EV manufacturer on the planet. However, BYD doesn't sell EVs in the United States and therefore is not a direct competitor to Tesla on its home turf. But another fast-rising EV manufacturer does: Toyota Motor Corporation ( TOYOF )( TM ). For many years, Toyota chose to shun the EV market to focus on ICE-based vehicles and hybrids. However, sales of Toyota's fleet of BEVs are booming, and it has aggressive EV plans moving forward. Meantime, Toyota has a number of competitive advantages in the U.S. market and, as a result, has positioned itself to be a "Tesla slayer". Toyota's stock currently trades with TTM and forward P/E's of under 10x, yields 2.3%, and in my opinion is undervalued here. Further, and despite all the fanfare Tesla receives on a daily basis, Toyota stock - both the OTC and NYSE listings, which as you can see almost identically track each other - has significantly outperformed TSLA over the past 3 years:

Investment Thesis

In the United States, Toyota enjoys a number of advantages as compared to Tesla:

• A large and well-established retail dealer network for new & used sales, customer support, parts & maintenance, and vehicle repair.
• A much more diverse product line.
• A CEO that is not in the headlines every day making controversial political statements that alienate many would-be consumers.
• Toyota's CEO is not spread-thin with ownership and management duties in a number of relatively disassociated industries.
• Toyota pays an annual dividend of $4.50/share while Tesla's is $0.

Perhaps even more importantly, the Toyota and Lexus brands consistently score higher than Tesla in well-respected reliability reports. For example, consider the recent Consumer Reports' 2023 rankings which places Toyota on top and Tesla well-back in the middle of the pack:

Meantime, Tesla's margins are falling while Toyota's are rising. Yet despite these advantages, Tesla's TTM and forward P/Es of ~70X are a whopping seven times that of Toyota.

It may sound like a brash statement (or perhaps even blasphemy…) to many die-hard Tesla fans, but taken in totality, perhaps Tesla investors should consider cashing-out and investing in Toyota instead.

Quarterly Earnings & Sales

Toyota North America recently announced full-year 2023 sales of 2.2 million units (+6.6% yoy) , led by a 30% surge in electric vehicle sales (which Toyota defines as EVs, hybrids, PHEV, and fuel-cell) which, in aggregate accounted for 657,300 vehicles - or ~30% of total NA sales.

But make no mistake about it, Toyota isn't just strong in North America. Indeed, over the first six months of FY24, this slide from the Q2FY24 presentation shows that Toyota's sales were strong across all geographic regions:

Note: Toyota has a strange way of presenting YoY results, "114.1%" top line sales growth actually means sales were +14.1% yoy. Likewise, Electrical Vehicle sales (as defined previously), were +38.1% yoy.

Better still, and as mentioned previously, Toyota's margins are rising:

As you can see from the slide, operating margin increased 11.6% while net margin increased 11.8%. While some of that can be attributed to a foreign exchange tailwind (+$160 billion yen of operating income), clearly the majority of margin expansion was due to a favorable volume, sales mix, and pricing. More details can be found in the Q2FY24 report , which was announced on November 1st (Q2 diluted earnings per share was 191.26 yen, +124% yoy).

Contrast that with Tesla's more recent Q3 report . While total sales growth was respectable (+18% yoy), operating margin was only 7.6%, down a whopping 9.6 percentage points yoy, and ~4 percentage points lower than Toyota. Tesla's Q3 EPS of $0.53/share was down yoy (-44%).

In summary, Toyota's margins and earnings are rising, while Tesla's margins and earnings are falling. The two companies are clearly moving in opposite directions. That being the case, I would argue that it is Toyota stock that should trade at a premium to Tesla instead of trading at a whopping 7x discount (in terms of P/E).

Going Forward

Tesla's relatively high-cost vehicles will likely continue to see price cuts in order to compete with BYD. Indeed, just last Friday Tesla cut prices of its EVs made in China by another 6%. This must be frustrating to consumers who find themselves owning a Tesla vehicle for which the same exact model can now be bought, brand-new, for thousands of dollars less than they paid.

Meantime, those Tesla price cuts were likely one big reason that Hertz Global Holdings, Inc. ( HTZ ) decided to sell one-third of its EV inventory (i.e., depreciation), which was estimated to be ~80% Tesla vehicles. Barron's said this looks bearish for Tesla shares , and it will certainly put further pressure on the Tesla used vehicle market, further frustrating Tesla owners.

Meantime, Toyota NA VP Jack Hollis said this when releasing the full-year sales report referenced above:

By the end of 2025, we plan to have an electrified option available for every Toyota and Lexus vehicle in the US.

As I reported in a previous Seeking Alpha piece, Toyota is making this big push into EVs just as the prices of EV battery metals like lithium and cobalt have fallen quite dramatically (see BATT: Falling Battery Prices Great For EV Consumers ). That being the case, and that the battery pack is far-and-away the largest component cost of an EV, Toyota's timing couldn't be better: the company will be able to introduce new and exciting EV models (including the new all-electric bZ4X , available now) at price points in which Tesla will likely have to respond with more price cuts in order to compete, putting more pressure on TSLA's margins. So too will recent pay hikes at Tesla's U.S. factories .

Going forward, Toyota should continue to benefit from a diverse and well-rounded product line, its partnership with Contemporary Amperex Technology (the world's largest EV battery maker), and its new Toyota New Global Architecture ("TNGA") initiative, which is expected to lower initial assembly plant coasts by ~40%.

Meantime, the weak Japanese Yen is expected to be a nice tailwind in 2024. As a result, TMC management has guided operating income to be ~50% higher than its previous forecast with expectations for operating margin to reach 10.5% instead of 7.9% (see full Q2 results and transcript here ).

Market Sentiment

Just recently, Seeking Alpha reported "EV Stocks Continue to Slide As Investors Favor Toyota, Honda, Ferrari ". At time of writing (Wednesday 1/17), TSLA is down 3.4% (-$7.45). In comparison, and in today's weak market, Toyota is down only 0.78%.

The point is, with Tesla's huge valuation premium over Toyota, and while Toyota's fortunes are rising while Tesla's are heading in the other direction, I suspect there is likely much more downside in Tesla stock and that TM will significantly outperform TSLA this year.

Summary & Conclusion

Many consumers have been disappointed by Toyota's slow embrace of EVs. I myself am a long-time Toyota owner and had pretty much resigned myself that a Tesla would be my first EV. That is no longer the case. I am one of those that has been turned-off by Elon Musk's rhetoric with his apparent pivot to the right, and support of the Republican Party that appears to want to roll back President Biden's Clean-Tech Act (or "IRA"), with its primary energy policy to "make coal great again". That being the case, Musk is arguably no longer the environmentalist he painted himself to be. In addition, his political rhetoric - in my opinion - while perhaps possibly benefiting him personally (i.e., more traffic on "X", big tax-cuts, etc.), increasingly works against the best interests of Tesla shareholders in my view. Indeed, I believe the Tesla Board of Directors appears to be either unwilling or unable to reign-in the CEO .

Bottom line: Toyota's margins and earnings are rising while Tesla's margins and earnings are falling. Meantime, Tesla's P/E trades at a whopping 7x that of Toyota. My advice: Sell Tesla, Buy Toyota.

Note: Toyota trades on its home market (i.e., the Tokyo stock exchange) as TMC (#7s03). These shares are traded on a Japanese Yen basis.

The OTC version of Toyota stock ("TOYOF") trades at ~1/10th the price of the NYSE issue (i.e., "TM"). Both of these U.S. listings are American Depository Shares (i.e., "ADS") and denominated in U.S. dollars. Current quotes of the ADS shares at pixel time are:

TOYOF:$19.32.

TM: $194.18.

All things being equal (but recognizing they seldom are…) a weaker Yen should benefit the Tokyo listing more than the U.S. listings (i.e., big sales in the U.S. translate into more Yen when the Yen weakens relative to the U.S. dollar), but all Toyota listings should benefit from the trends in the company's fundamentals as reported in this article. However, American investors likely have much easier access to the ADS shares TOYOF and TM.

I'll end with a 1-year chart showing the very strong rally of the US$ versus the Japanese Yen:

For further details see: