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Toyota (TM) Rises Roughly 50% in a Year: Time for Profit-Taking?
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Japan’s auto giant Toyota (TM - Free Report) had a stellar run on the bourses over the past year. Shares of the company have risen 49.3%, outperforming the industry and the S&P 500’s growth over the timeframe. The world’s largest automaker by volume notched record highs in production, sales and profit in fiscal 2024 (ended in March 2024).
One-Year Price Performance
Image Source: Zacks Investment Research
So, following the impressive performance, should you buy the stock for more upside potential or cash out the gains?
A Blockbuster Fiscal 2024
In fiscal 2024, Toyota’s consolidated global vehicle sales (encompassing Toyota and Lexus brands) rose 7.3% year over year to 10.31 million units, surpassing the 10 million mark for the first time. Production also saw a notable increase, up 9.2% to 9.97 million units. Sales and production got a boost from strong demand for the company’s trucks and SUVs, coupled with easing supply chain constraints.
Toyota's sales of hybrid vehicles were particularly impressive. The company sold approximately 3.7 million hybrids (accounting for 33% of the global volume), up 32% year over year. These hybrids are often as profitable, if not more, than their gasoline-only counterparts. Thanks to record-high sales, Toyota's fiscal 2024 profits nearly doubled to ¥5.35 trillion, the highest ever for a fiscal year. In the trailing four quarters, Toyota beat earnings estimates on all occasions.
Image Source: Zacks Investment Research
Shareholders benefited from this financial success as well. Toyota paid a total dividend of 75 yen per share, up from 60 yen in fiscal 2023, with total dividends exceeding 1 trillion yen.
While Koji Sato’s first year as Toyota’s CEO ended on a high note, there are indications that fiscal 2025 may present challenges.
A Bumpy FY25 Ahead?
Sato has warned of a potential slowdown in sales growth, increased U.S. incentives, and a slight decline in profits. The company anticipates profits to be under pressure due to significant investments in human capital and next-generation technologies, such as electrification.
Toyota plans to spend roughly 380 billion yen this fiscal to improve human capital throughout its supply chain, including efforts to support wage increases, enhance working conditions at suppliers and dealers, and improve its own offices and factories.
Additionally, the company will increase spending on research and development (R&D) and capital expenditure, focusing on growth technologies. These include electrification, hydrogen powertrain systems, software-defined vehicles and artificial intelligence. The total investment in these areas will amount to ¥1.7 trillion, up ¥0.5 trillion from the previous fiscal year.
This substantial outlay will impact earnings. Toyota forecasts a 20% year-over-year decline in operating profit to ¥4.3 trillion. Net income is also expected to fall by nearly 30%, with the net margin projected to decrease to 7.8% from the previous 11%.
Additionally, global retail sales are forecast to dip by 1.3% to 10.95 million vehicles, compared to the record 11.09 million in the last fiscal year. This is partly because much of the pent-up demand was met in fiscal 2024. Specifically, Toyota expects sales in Japan to decrease amid a decrease in shipments of Daihatsu brand vehicles.
And while operations in North America bounced back to profitability due to tight inventories, low incentives, and strong sales of higher-margin vehicles in fiscal 2024, Toyota is cautious about fiscal 2025 as the competitive landscape in the United States is heating up. The company anticipates increased pricing pressure in the country, which will likely necessitate higher incentives to capture volume, thereby squeezing profit margins.
As for electric vehicles (EVs), Toyota's stance remains conservative. Sato noted that the infrastructure to support widespread EV adoption is not yet in place, and the value proposition for mainstream customers is still lacking. Although Toyota plans to introduce a series of solid-state batteries to enhance its EV range and reduce production costs, these developments will not yield significant results before 2026.
What Should You Do With TM Shares?
Given the headwinds facing Toyota in fiscal 2025, it might be a prudent time for investors to consider booking profits. With a spectacular 49% gain over the past year and a 20% rise year to date, shares of TM seem ripe for profit-taking.
Moreover, the downward revisions in earnings estimates and the anticipated dip in profits suggest that the stock may not continue its upward trajectory in the short term.
Image Source: Zacks Investment Research
Additionally, Toyota’s price-to-earnings ratio is currently higher than the industry average and its five-year median values, indicating that the stock is relatively pricey.
Image Source: Zacks Investment Research
While Toyota’s long-term prospects remain strong, driven by its investments in next-generation technologies and strategic market positioning, the near-term challenges warrant a cautious approach. Therefore, cashing out the gains at this juncture could be a wise move for investors.
Image: Shutterstock
Toyota (TM) Rises Roughly 50% in a Year: Time for Profit-Taking?
Japan’s auto giant Toyota (TM - Free Report) had a stellar run on the bourses over the past year. Shares of the company have risen 49.3%, outperforming the industry and the S&P 500’s growth over the timeframe. The world’s largest automaker by volume notched record highs in production, sales and profit in fiscal 2024 (ended in March 2024).
One-Year Price Performance
Image Source: Zacks Investment Research
So, following the impressive performance, should you buy the stock for more upside potential or cash out the gains?
A Blockbuster Fiscal 2024
In fiscal 2024, Toyota’s consolidated global vehicle sales (encompassing Toyota and Lexus brands) rose 7.3% year over year to 10.31 million units, surpassing the 10 million mark for the first time. Production also saw a notable increase, up 9.2% to 9.97 million units. Sales and production got a boost from strong demand for the company’s trucks and SUVs, coupled with easing supply chain constraints.
Toyota's sales of hybrid vehicles were particularly impressive. The company sold approximately 3.7 million hybrids (accounting for 33% of the global volume), up 32% year over year. These hybrids are often as profitable, if not more, than their gasoline-only counterparts. Thanks to record-high sales, Toyota's fiscal 2024 profits nearly doubled to ¥5.35 trillion, the highest ever for a fiscal year. In the trailing four quarters, Toyota beat earnings estimates on all occasions.
Image Source: Zacks Investment Research
Shareholders benefited from this financial success as well. Toyota paid a total dividend of 75 yen per share, up from 60 yen in fiscal 2023, with total dividends exceeding 1 trillion yen.
While Koji Sato’s first year as Toyota’s CEO ended on a high note, there are indications that fiscal 2025 may present challenges.
A Bumpy FY25 Ahead?
Sato has warned of a potential slowdown in sales growth, increased U.S. incentives, and a slight decline in profits. The company anticipates profits to be under pressure due to significant investments in human capital and next-generation technologies, such as electrification.
Toyota plans to spend roughly 380 billion yen this fiscal to improve human capital throughout its supply chain, including efforts to support wage increases, enhance working conditions at suppliers and dealers, and improve its own offices and factories.
Additionally, the company will increase spending on research and development (R&D) and capital expenditure, focusing on growth technologies. These include electrification, hydrogen powertrain systems, software-defined vehicles and artificial intelligence. The total investment in these areas will amount to ¥1.7 trillion, up ¥0.5 trillion from the previous fiscal year.
This substantial outlay will impact earnings. Toyota forecasts a 20% year-over-year decline in operating profit to ¥4.3 trillion. Net income is also expected to fall by nearly 30%, with the net margin projected to decrease to 7.8% from the previous 11%.
Additionally, global retail sales are forecast to dip by 1.3% to 10.95 million vehicles, compared to the record 11.09 million in the last fiscal year. This is partly because much of the pent-up demand was met in fiscal 2024. Specifically, Toyota expects sales in Japan to decrease amid a decrease in shipments of Daihatsu brand vehicles.
And while operations in North America bounced back to profitability due to tight inventories, low incentives, and strong sales of higher-margin vehicles in fiscal 2024, Toyota is cautious about fiscal 2025 as the competitive landscape in the United States is heating up. The company anticipates increased pricing pressure in the country, which will likely necessitate higher incentives to capture volume, thereby squeezing profit margins.
As for electric vehicles (EVs), Toyota's stance remains conservative. Sato noted that the infrastructure to support widespread EV adoption is not yet in place, and the value proposition for mainstream customers is still lacking. Although Toyota plans to introduce a series of solid-state batteries to enhance its EV range and reduce production costs, these developments will not yield significant results before 2026.
What Should You Do With TM Shares?
Given the headwinds facing Toyota in fiscal 2025, it might be a prudent time for investors to consider booking profits. With a spectacular 49% gain over the past year and a 20% rise year to date, shares of TM seem ripe for profit-taking.
Moreover, the downward revisions in earnings estimates and the anticipated dip in profits suggest that the stock may not continue its upward trajectory in the short term.
Image Source: Zacks Investment Research
Additionally, Toyota’s price-to-earnings ratio is currently higher than the industry average and its five-year median values, indicating that the stock is relatively pricey.
Image Source: Zacks Investment Research
While Toyota’s long-term prospects remain strong, driven by its investments in next-generation technologies and strategic market positioning, the near-term challenges warrant a cautious approach. Therefore, cashing out the gains at this juncture could be a wise move for investors.
TM currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here