Toyota Drives Japanese Stocks To Fresh Highs, More Gains Likely (NYSE:TM)

Japan has emerged as a hotbed of bullish equity activity. The Nikkei 225 Index recently notched all-time highs, finally eclipsing its December 1989 peak near 39,000. Times are starkly different today compared to 34-plus years ago, however. Back then, the Japanese stock market was at the peak of one of the most epic euphoric bull markets in history. The TOPIX P/E ratio was above 70 for a time. Jump ahead to today, and Japanese equities broadly trade with mid-teens forward P/E. And unlike much of the time post-1989, the country’s stock market features robust momentum and earnings growth.

I have a buy rating for Toyota Motor (NYSE:TM). I see its positive technical trend married with a solid valuation, though earnings growth must prove itself through the coming years.

Japan’s TOPIX Soars While Its Valuation Remains Low

According to Bank of America Global Research, Toyota ranks among the largest automakers globally. It competes with industry leaders like VW Group and GM in terms of sales volume. Although it faced challenges such as quality issues in the US and production cutbacks after the 2008 financial crisis and Japan’s earthquake, Toyota managed to regain its position as the top global market shareholder by 2012. While the US market traditionally drives its earnings, Toyota has recently expanded its reach into emerging markets like ASEAN and India. It boasts the highest domestic production rates among Japan’s big three automakers, which include Toyota, Nissan, and Honda.

Earlier this month, Toyota handily beat earnings expectations. Shares rose 7.8% following the Q3 2024 release, according to Option Research & Technology Services (ORATS), while the market was expecting just a 3.4% stock price swing post-earnings.

The early call for Q4 per-share profit on TM ADR shares is $2.71, which would be a slight decrease from $3.02 of EPS earned in the same period a year ago. The management team did cut its FY vehicle sales forecast from 9.6 million to 9.45 million, so it will be key to pay attention to overall growth trends in the quarters ahead.

Toyota: A String of EPS Beats, Shares Jumped Post-Reporting in February

On valuation, analysts at BofA see earnings rising by a whopping 85% for the year just finishing up while FY 2025 EPS is seen jumping by 12% to the equivalent of about $24.70 with continued growth through 2026. The current consensus estimate, per Seeking Alpha, shows more tempered per-share profit figures, with potentially declining EPS through 2026 while Toyota’s top line increases at a low-to-mid-single-digit pace over that time.

Dividends, meanwhile, are expected to increase at a high rate over the coming quarters, though its yield near 1.9% today is not particularly impressive. Still, TM features solid free cash flow and an EV/EBITDA multiple of about 10 following the share-price rise since Q2 of last year.

Toyota: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

Given some industry tailwinds and a growth trajectory that has been in place, I assert that a 10 P/E is too cheap today. If we apply an earnings multiple between TM’s 5-year historical average and the sector median, say, near 12, and assume $22 of normalized EPS, then the US ADR should trade near $264. Also consider that TM’s management team raised its FY 2024 outlook in its earnings release earlier this month, while the company topped expectations, nearly doubling profits in Q3 2024.

Toyota: Cheap on Earnings, Solid Cash Flow Trends

Compared to its peers, TM features a lukewarm valuation, though it is hard to scoff at this blue chip’s 10 P/E in my view considering its earnings quality. But growth trends are very strong, as are its overall profitability trends. From a technical point of view, share-price momentum is stout, which is indicative of TM being among the world’s leading stocks over the past year. Finally, EPS revisions are to the good side, and we will get a sales update later this week.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2024 earnings date of Wednesday, May 8 BMO. Before that, the company will report monthly auto sales interim data on Thursday, February 29. US auto sales figures will be released on Friday, which could also cause volatility in the industry.

Corporate Event Risk Calendar

The Technical Take

TM has been a major winner over the past year. Easily outpacing many of its rivals, including Tesla (TSLA), the stock could be a bit stretched in the very short term. Notice in the chart below that TM has risen from $178 at the end of 2023 to near $240 today. Volume has also increased during this bullish phase. The RSI momentum indicator at the top of the graph is now at 80, but it has been at that level for two weeks now as buying pressure has been just that strong.

Normally with moves like that, the valuation is a concern, but TM remains a somewhat cheap stock as it captures the attention of momentum-focused investors. Now at all-time highs, there is no obvious resistance. The previous peak at $211 could act as support, with further buyers perhaps stepping in near $195 – the peak from September 2023. With a positively sloped long-term 200-day moving average, the trend favors the bulls, though TM is now $60 (about 25%) above that trendline indicator.

Overall, I see more upside ahead based on momentum, and the prior high should offer support if we do see a pullback during what has been historically a bearish stretch from February through April, according to Seeking Alpha’s seasonality tool.

Toyota: Bullish Upside Breakout, Lofty RSI Amid Intense Buying Activity

The Bottom Line

I have a buy rating on Toyota. The company boosted its guidance earlier this month, and the stock’s valuation is attractive despite the rapid share-price run-up.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.