Time to Swoop in on Toyota?
We’re all aghast at Toyota Motors’ fall from grace. But we’re investors here, so let’s be honest. Toyota’s current car-quality woes and a dramatic decline in its share price may well provide a Buffett-esque investment opportunity. Toyota’s American depositary shares (symbol TM), nearly $92 on January 19, closed at $74.60 on February 9.
As Kiplinger columnist Andrew Feinberg pointed out in his October 2009 column Profit from Scandal, American Express once discovered that a slippery affiliate had scammed it out of $150 million worth of salad oil. The stock dropped, but Buffett bought, knowing that Amex’s charge-card business was still strong. He tripled his money in three years.
Vulture investing is a tricky business, though. It requires a cold calculation on just how low a stock can go and nerves of steel because the stock of a company in trouble is usually extra-volatile. Plus, always lurking in the background is the well-known cockroach effect, which holds that just as a single cockroach portends more to come, corporate bad news often foreshadows additional problems.
Here’s a quick recap of the Toyota situation: A number of Toyota models have been found to have the potential for sudden acceleration, and the Prius, Toyota’s flagship gas-electric hybrid, has braking issues. Toyota has not been quick to own up to the problems and may have covered them up, or at least not addressed them as forthrightly as it should have.
Toyota estimates that the acceleration issues alone will cost it $1.1 billion. That apparently includes the cost of two recalls and total global sales losses of 100,000 vehicles, including 80,000 in North America (charges to cover the cost will be taken in the current fiscal year, which ends March 31). On February 9, the company announced it will recall more than 400,000 Priuses and Lexus hybrids, although it insisted that the cars meet safety standards.
Toyota hasn’t handled the crisis well, and new cockroaches, er, revelations seem to be emerging every week. One that came to light recently was that similar acceleration problems had surfaced previously on the same vehicles in Europe and had been corrected.
Toyota’s crisis management may have hit a low point at a February 5 press conference with chief executive Akio Toyoda. Some thought his apology fell short of an abject, Japanese-style mea culpa. But by that point only a good, old-fashion seppuku ceremony would have pleased all his critics.
And critics, including rivals, aren’t letting up. For example, Ford Motor (F) is reportedly planning a commercial dissing Toyota. It will feature pitchman Mike Rowe, host of Discovery Channel's Dirty Jobs -- could his day job be any more apropos? -- delivering the message: “Ford is better than Toyota, especially with Toyota recalling 2.3 million cars and trucks.” Late-night comedians will continue their feeding frenzy.
But I wouldn’t be too worried about these kinds of attacks, especially those that verge on the xenophobic. Toyota is almost as American as mom and apple pie. It employs more than 35,000 people at ten plants in the U.S. Another 166,000 are indirectly employed by Toyota, through dealerships and such. Of the 2.2 million Toyotas we buy annually, half are made in America.
Also, a quick look at Toyota’s financials puts the company’s recent woes in perspective. In the fiscal year that ended March 2008, Toyota posted a profit of $17.1 billion ($5.39 per American depositary share), against which a $1.1 billion write-off looks paltry. Fiscal 2009, of course, coincided with the financial meltdown, which goes a long way in explaining Toyota’s loss of $4.4 billion ($1.42 per ADS). Analysts on average estimate that Toyota will lose 29 cents per ADS in fiscal 2010 and earn $2.78 in fiscal 2011.
Plus, and this can’t be understated, Toyota has more than 50 years of American goodwill under its obi (the sash on the kimono). When we needed gas-sipping small cars in the 1970s, Toyota provided good ones. When Ford was trying to worm its way back into our good graces with its slogan “Quality is Job 1,” Toyota was actually producing high-quality cars. Ford may be the quality equal of Toyota now, but Toyota was the standard-bearer for high quality for years while Detroit was selling us junk and appealing to our patriotism to boost sales. This is one reason that Chrysler and General Motors executives got so little sympathy when they asked for bailout money last year.
The stock market is inefficient in many ways, but it usually has a way of marking down the share prices of troubled companies quickly and accurately. For example, just hours after the Challenger space-shuttle tragedy, the market had identified contractor Morton Thiokol as likely responsible, and discounted its stock drastically.
Yes, more cockroaches may emerge from Toyota’s cars, its factories and its battered PR apparatus. But, barring any serious new revelations, this may be a good time for vultures to swoop in on Toyota’s battered stock.