Financial Analysis

Toyota Motors: Worth Investing in? Stock market represents a general term for an organized trading of securities on various exchanges and electronic market. Common stocks, preferred stocks, options, rights, convertibles, bonds, futures, and others are sold in stock market. As a part of regular class activity in Investment class, a close analysis of some of the stocks was made by the students. A lot of stocks, bonds, options, futures, and others were traded as a part of the trading activity. My portfolio, at the end of the trading cycle was fairly stable. The stocks that I purchased included Glaxosmithkline Plc (GSK), Toyota Motors (TM), Wal-Mart (WMT), Microsoft (MSFT), TXU Corp. (TXU), Yahoo! (YHOO), and Qwest Communications International Inc. (Q). The other transactions included the buying of B-AMR (option), and OGM670.CMX (bond). The market ran fine most of the times except for at the times when the whole stock market went down. For example, the stock market was down on March 14, 2007 where the Dow Jones Industry Average was down by almost 150 points. This illustrates that stock market on one hand might generate profits but the risks are associated in every transaction made. The following graph illustrates the fluctuations in the stock market and thus the portfolio values.

Hence, stock market is an unpredictable market but a lot of factors might be analyzed to reduce the risk associated with stock market. These factors include the company’s future growth potential, earnings, P/E ratio, and others. One of the stocks that I purchased was of Toyota Motors (TM). Toyota is a world famous brand for its strong, fuel efficient, and environment friendly cars. Based in Japan, Toyota trades all around the world. Needless to say, one of the biggest markets for Toyota is United States. It has a current market capital of $225.39 billions where as the average industry market capital is only $17.58 billion. The P/E ratio is 14.83 which means the average investors can receive their total investment in roughly 14.83 years. Usually when the P/E ratio is a higher number (say 50), it means that the investors should wait for longer time to receive their invested amount back. This would mean that lower the P/E ratio the sooner the time comes for the investor to go break even and the return after the breakeven point is true profit. Meanwhile, if the P/E ratio is too low, usually the earnings might be overstated thus creating a condition for watered stock. This would mean that the investor cannot receive the promised returns. The other measure that is liked with P/E ratio and probably the most prominent factor is earnings or net income. One of the basic importance of earnings is that if the company is increasing its earnings, the investors feel safe that they would get enough returns. The net income of the company was growing. During the financial year ending 2005, the net income available to the shareholders was $10,907,000,000 and then in year ending 2006 was $11,681,000,000. This was a gradual progress in the company. The basic assumption behind the companies with higher earnings is that higher the earnings, more flexibility for the company, higher potentiality for growth, and more net income available to the shareholders. The 8% increment in the stockholders’ equity over 2005 and 2006 was another plus point for Toyota.

On the other hand, financial news plays an important aspect for the company’s increment in stock price. As the Chairman of the board of directors Fujio Cho illustrated in his message for the stakeholders, Toyota is expanding its territory globally. Following this, a lot of other headlines regarding the progresses made by Toyota were printed. For example Associated Press’ news said ‘Global Production at Toyota up in February’, AP also said ‘High demand for hybrid cars’, CNN Money.com’s news said ‘Nissan to cut down 1500 jobs’, PR Newswire’s news said ‘Toyota to open plant in Mississippi’, bizjournals said ‘Toyota to open a new distribution center in Northern Kentucky’, AP’s news read ‘Lexus named World Car of the Year’, and other news were also coming out. On one hand Toyota was getting favorable news where as its competitors like GM and Ford were getting unfavorable news like loosing sales and cutting jobs. This news gives a glimpse how Toyota is progressing. Needless to say, just ordinary news cannot be the sole reason for the stock prices to go up. The investors should have a solid reason to believe whether this would be a fruitful stock to pay for. In Toyota’s case, the solid earnings and a potential for growth are clearly visible. Toyota is an outstanding stock in its industry was well. If analyzed, it excelled the industry average and its competitors in a lot of aspects. For example, the quarterly revenue growth for the industry is averaged at 7.70% but Toyota reports it to be 15.20 %. Its other major competitors like Ford, GM and Honda report it to be -13%, -2.6%, and 12% respectively. Another sector that Toyota excels the industry and competitors is Earnings per Share (EPS). Toyota reports its EPS as 8.42 where as industry average is just 1.21. Toyota also has a better P/E ratio of 14.83 when the industry average is 19.02. Not only do the numbers talk but the news also reveal a lot of secrets why Toyota stands better than the industry. Needless to say, after analyzing

the numbers and the news, Toyota can be accepted as the biggest car manufacturer in the whole world. The history of Toyota is also impressive. It started its operation in the US in 1957, a time where an imported car was doubted to be able to win market share in the United States. This was the time when the Americans wanted big trucks; Toyota came with fuel efficient small vehicles. Amidst a lot of struggle, Toyota has been able to operate eight plants in different parts of the United States today and has the highest number of sales. But the future for Toyota looks even more productive. As the gas prices have gone up and environment issues are often talked about, there is a vast need for environment friendly and fuel efficient vehicles. One of the reasons why Toyota has been able to excel in these fields is that it has been able to beat the market in terms of technology and future expectations. For example, keeping in mind that there will be a threat of environmental issues in the future, Toyota had started building its hybrid cars during 1980s. Though a lot of American families still prefer big vehicles, it has been a must that they switch to something smaller and the best name that comes up is Toyota. Quality is another important aspect that comes in play for Toyota’s popularity. Whenever there is a question about quality, Toyota believes in the concept of total quality management. It receives premium quality of raw materials from the suppliers and chooses skilled technicians to build up the vehicles. After the vehicles are ready, a series of collision tests are performed and the flaws are then corrected. Finally, after a close supervision of the final products, they are brought to the market. Toyota’s opening of new plants in the United States is yet another step towards minimizing the foreign exchange risks. Year

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1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

308 301.15 270.00 265.83 265.50 264.95 265.30 263.45 265.30 265.70 266.68 279.00 280.00 299.00 287.60 276.00 279.75 281.90 284.10 297.80 302.70 298.50 299.85 300.10 300.95 297.85 286.60 293.80 293.30 291.35 296.35 297.35 297.90 302.70 301.80 303.00 305.15 303.70 302.25 299.70 299.40 299.95 297.40 293.40 288.76 287.30 293.70 296.45 293.00 288.25 283.25 277.30 277.50 277.30 266.50 266.30 267.43 264.50 250.65 244.20 240.00 241.74 238.83 223.40 223.90 223.15 204.50 190.80 190.00 189.15 176.05 197.80 195.10 201.40 202.35 209.30 219.15 219.70 217.00 216.90 220.05 223.45 237.80 249.50 239.90 238.80 249.80 249.70 238.30 224.40 218.15 226.85 219.20 212.00 211.75 216.75 203.60 205.20 208.85 211.40 215.00 223.50 225.75 239.75 228.75 231.55 233.35 214.15 220.25 228.45 235.20 248.30 236.30 243.70 255.55 256.65 259.60 269.40 277.40 253.45 235.30 238.40 235.55 239.30 237.70 238.60 239.80 241.50 246.75 236.10 233.65 234.20 232.00 234.74 233.28 224.75 226.30 231.63 237.45 245.45 241.70 245.40 245.30 246.50 251.58 254.78 259.00 250.70 251.40 251.78 248.95 236.65 237.10 216.00 211.80 202.05 200.60 192.65 180.45 179.65 168.10 172.05 163.95 154.15 156.05 153.63 161.45 162.20 160.10 152.30 153.15 145.65 139.65 144.15 146.75 149.25 142.35 146.35 138.55 132.45 122.00 127.18 128.12 124.50 124.82 124.80 132.20 132.53 134.97 134.30 125.00 121.85 125.90 129.13 127.15 132.55 132.49 142.70 143.95 138.40 144.28 139.35 142.15 142.90 143.40 144.40 148.52 157.65 159.08 151.75 152.85 147.50 144.50 137.95 129.35 132.75 135.40 131.40 131.95 140.55 137.42 137.97 138.15 137.83 136.88 132.95 131.00 130.07 125.25 125.78 129.33 133.05 133.38 128.33 125.55 127.30 123.42 119.25 123.35 124.75 124.65 124.30 117.85 115.35 111.10 107.45 106.51 105.60 104.18 105.10 108.23 108.82 111.89 109.55 104.30 102.80 102.38 104.38 98.95 99.93 99.57 98.59 97.37 98.98 99.83 98.58 96.93 88.38 83.77 83.19 84.77 88.17 97.46 98.18 101.90 101.66 102.91 106.92 104.58 106.49 104.29 108.37 109.88 107.13 108.40 111.45 113.27 113.44 115.98 122.13 120.88 123.97 126.92 116.43 114.30 117.74 119.39 121.44 120.29 127.66 129.92 127.34 126.72 133.39 131.95 138.72 139.95 143.79 141.52 135.72 116.09 123.83 115.20 115.98 120.32 119.99 119.59 121.37 120.87 115.27 110.19 105.66 104.89 102.42 102.08 106.90 110.27 105.29 106.44 107.30 105.40 109.52 106.43 107.75 108.81 111.07 114.90 116.38 116.44 125.27 124.06 119.06 124.27 124.79 118.92 119.29 121.84 123.98 131.47 132.94 133.89 132.71 127.97 123.96 119.22 119.82 117.97 121.79 122.48 122.44 119.37 119.21 117.75 119.02 119.46 118.63 119.82 120.11 117.13 110.48 108.99 109.34 106.97 105.88 109.08 103.95 110.44 109.56 108.69 111.67 109.86 110.92 105.87 103.17 103.78 103.58 104.58 106.97 105.87 108.17 110.37 112.18 111.42 113.28 115.67 119.46 117.48 117.18 116.35 117.47 114.32 111.85 114.66 114.47 117.23 117.91 118.01 117.23 115.57 118.72 121.29 115.86

If we look at the historical prices above, there is a high fluctuation in exchange rate between Japanese Yen and US dollars. Being a multinational company, when Toyota produces its automobiles in Japan, the manufacturing cost is associated with the Japanese Yen. Now when

they are exported to United States, the exchange rate creates a lot of problems. For instance, if the vehicles are manufactured when Yen was devalued with UDS and later it appreciates with USD when it is time for Toyota to sell its products, Toyota should sell the products in a higher price to compensate for the appreciation of Yen. This is a complete opposite of what the American customers are looking for. Hence, when it opens new plants in the US itself, this exchange rate risk is minimized. This would let Toyota manufacture its products at the local prevailing prices. Also, when the manufacturing plants are established locally, this would give local employment. This will create a positive mentality for these people to believe in Toyota. For example, Wal-Mart has been able to be most people’s favorite because it operates and employs people locally. When companies operate and employ people locally, the state government also gives tax benefits to these local companies. Apart from some tax exemptions, the state government also provides them with land and other resources that the state government can afford. These are the major reasons why I thought Toyota (TM) would be a good stock to invest in. Though TM would not generate an immediate high return, this stock would keep on giving great returns. Assumptions might be made that Toyota’s market might be saturated but I think there is still a lot of room for Toyota to progress. On one side the need for fuel efficient small cars is towering in US itself as discussed earlier where as on the other side, Toyota is increasing its market throughout the world. 75 stocks for TM were bought for $126.94 in market price. Also, a commission of $25 was associated with the transaction. This totaled $9545.50 paid in total. The reasons why 75 stocks were bought were to minimize the effect of the commission over the number of stocks.

For example had I bought 50 stocks, this would mean $0.5 paid per stock as commission but now as 75 stocks were bought, $0.33 was paid in average per stock. But this does not mean that higher the number of stocks, lower the per stock commission, and better the transaction. But in fact there is a need for tradeoff between the price paid and the return anticipated. Around $10,000 was supposed to be the best investment amount and 75 was the perfect number of stocks that could be purchased by minimizing the effect of commission. The stock was purchased in market price. Market price refers to buying or selling of stock at the immediate best price when the order reaches the trading floor. Had it been felt that the price for TM was going down; short sell would have made sense. Similarly, had there been a case that a risk could have been assumed for a commission, options would have been bought or had there been news or reasons for buying the stock in certain given price, limit order had been an option. Since, the price of TM seemed to be flowing up eventually with the market and beating the market, market order was supposed to be the best option. Hence, for all these reasons, 75 stocks of TM were bought for $126.94 market price. During the overall range, the stocks were progressing and I as an investor am getting favorable results.

Works Cited: <www.finance.yahoo.com>

<www.toyota.com> <www.stocktrak.com>