Is Toyota a Smart Buy Below $200?

The big players in the automotive industry aren't exactly the go-to choices for market-beating investments these days. Despite some recent gains, major automakers listed on U.S. exchanges have underperformed the S&P 500 index this year, often significantly.

Among these lagging giants is Toyota Motor (NYSE: TM), the leading Asian auto manufacturer. Despite its storied history, Toyota has faced its share of challenges recently. Yet, with its current valuation, some might view its stock as a contrarian buy in a market where traditional automakers aren't exactly in favor.

Navigating Global Market Challenges

As a global manufacturer, Toyota is inevitably affected by the fluctuations of regional and national markets. The first half of this year brought mixed results for the company. On the bright side, Toyota retained its crown as the world’s top carmaker in terms of unit sales, with 5.16 million vehicles sold during this period.

However, this figure represents a nearly 5% decline compared to the same period in 2023. Toyota's performance in its home market of Japan was particularly troubled. Its Daihatsu small-car division got caught up in a testing scandal, halting shipments for several months and leading to a 32% year-over-year drop in domestic sales.

China, a vast and crucial market, also proved disappointing. Sluggish economic growth, fierce competition, and strong government support for domestic carmakers resulted in Toyota's sales there plummeting by almost 11% over six months.

Thankfully, the company found success in other regions. Despite skepticism about Toyota's relatively slow adoption of pure electric vehicles (EVs), its focus on traditional internal combustion engine (ICE) and hybrid models has proven advantageous. With EV prices still high—consider the Tesla Model S, which starts at $68,490—Toyota’s more affordable alternatives, particularly its Lexus models, have appealed to many consumers.

This was evident in North America, where Toyota and Lexus models saw nearly a 15% increase in sales during the first half of the year. A similar trend occurred in Europe, where Toyota’s hybrid models continue to gain popularity, leading to a sales increase of just over 10%.

The Road Ahead: Challenges and Opportunities

Despite these positive results, maintaining such momentum might be difficult. In early August, the Bank of Japan raised its benchmark interest rate from 0.1% to 0.25%, marking its first increase since 2007. This rate hike strengthened the yen, creating potential headwinds for Toyota.

At the same time, Toyota’s management is shifting its strategy. The company plans to ramp up hybrid production and invest more in developing other green technologies, such as hydrogen-powered vehicles. If the explosive growth of EVs is indeed slowing, Toyota’s diverse approach could position it well for the future.

However, this shift, coupled with the strong yen, is expected to impact Toyota's profitability in the short term. Analysts project a dip in earnings for fiscal 2025, forecasting $21.71 per American depositary receipt (ADR), down from $22.58 in the previous year. But the slump may be short-lived, with a rebound to $22.85 per ADR anticipated in fiscal 2026.

Another factor in Toyota's favor is its consistent dividend payouts, a rarity for a company with significant operating costs. Currently, its dividend yields just under 2.2%, higher than the S&P 500 average of 1.3%.

The Bottom Line

Toyota's strategy, once viewed as outdated by some, has shown resilience and viability. While the strong yen poses challenges, the company’s popular vehicles and advanced technology should help it weather the storm. Toyota remains a leader in the auto industry, and its current stock price presents an attractive buying opportunity.

Should You Invest in Toyota Now?

Before making a decision, consider this: The Motley Fool's Stock Advisor team has identified what they believe are the top 10 stocks to buy now, and Toyota Motor isn’t on that list. The selected stocks have the potential to deliver substantial returns in the coming years.

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