February 2, 2010 - Toyota has a problem. Accelerators on eight models of its cars can stick, causing the car to race forward. It's a dangerous problem, and many owners are afraid to drive their Camrys. This is the world's largest car company with one of the largest car recalls in history. Dealers are closed down for several weeks. New cars aren't being sold. And it's not only the drivers and dealers that are nervous. So are investors.
As a complete contrast, look at Ford. It announced a 25% increase in sales in January. It sold 116,534 cars and trucks in one month, up from 93,506 last year in the first month of the year. And most importantly, it was the new cars that lead the way, not SUV's or trucks. Cars were up 43% with SUVs ahead by 8%. Crossovers (the new station wagons, mini SUVs) increased by 20%, and trucks went ahead by 14%. Of course, last January everyone thought the world was ending so it's easy to make a positive comparison. Still, these numbers are impressive and suggest Ford has made a real turnaround in its operations. It only reinforces the stellar results from 2009 when the company returned to profitability.
So do investors do the obvious: sell Toyota (TM) and buy Ford (F)?
Not so fast. In fact, buying TM may pay off handsomely over time. Investors have already been selling. The stock is trading at $78 at this writing, down from $92 only a few weeks ago. That's a correction of 18.5%. And if you look at a chart of the stock for the last year, it rallied from a low of $57 to a high of $92 with much of the trading around the $75 level. When the stock rallied higher, then fell back, it always found support at that price. It seems investors feel comfortable owning the stock there.
In terms of numbers: the company has a recall out for 2.3 million vehicles. The fix of the accelerator takes about 15 minutes. So those cars and trucks will be back on the road in a matter of weeks at a reasonable cost. But the 8 models in the recall accounted for 57% of Toyota's 2009 sales, according to Craig Hutson, an analyst at Gimme Credit. As for revving up production and selling again, the exec-vp of the Toyota believes there will be a double digit decline in Toyota's global sales due to its reputation being damaged. However, the company will restart production of the 8 U.S. models affected by the recall on February 8.
The competition isn't worrying about nor feeling bad for the market leader. GM, Ford, Honda, and Hyundai are offering an extra $1000 for any Toyota traded in for certain models of their cars or trucks. They want to take advantage of the problem, boost sales while they can. Of course, sellers might want to remember that their trade-ins are worth a lot less now that they have a problem. Over several weeks or months, the value of their cars, if the problem is fixed satisfactorily, will appreciate.
And that's ultimately where investors need to focus: value of the cars, value of the franchise, value of the companies. There's no question Toyota is hurting right now. But how long will that last for a juggernaut that was leading the market until a few weeks ago? That time frame will be defined by how quickly the accelerator problems are fixed and new cars start selling. The company isn't going away. It built a quality reputation over many decades. One problem, no matter how serious, is not going to completely wipe that out.
As for Ford, investors love all the good news. That's why the stock is trading at $11.50 at this writing. It would need to exceed by a good margin what analysts are already predicting for it to move ahead significantly.
I'm not advocating buying either one of these, but if you're looking at both of them, keep in mind that Toyota has been slammed hard for its mistake. It's going to fix it and come back with incentives to rebuild its market share. It didn't get to be number one by accident.
Weekly Newsletter
printer-friendly format