We also have the bombshell recall for Toyota that people are talking about this morning. Toyota stopping sales and production for eight models, the cars being recalled because of this sudden unintended acceleration problem as they describe it…” — Fox Business Network 1/27/2010
Toyota Motor (TM) has pulled eight popular models from the sales floor as the company confronts serious safety issues in these models. The world’s number one automaker will halt production of certain models starting next week, until they can straighten out their issues with sticky gas pedals in these cars that can make them accelerate without warning. Last week, Toyota recalled 2.3 million vehicles for this same problem, and an even larger recall of 4.2 million vehicles occurred in September. Clearly, the problem remains and the models affected include: the 2009-2010 RAV4, the 2009-2010 Corolla, the 2007-2010 Camry, the 2009-2010 Matrix, the 2005-2010 Avalon, the 2010 Highlander, the 2007-2010 Tundra and the 2008-2010 Sequoia.
In the near term, investors are rightly worried about the company losing some of its most popular models that accounted for 65% of sales for the Toyota brand (the parent company also owns Lexus and Scion brands). There is no timetable for getting these vehicles back onto the lots and ready for sales, as they will have to be absolutely sure the faulty accelerators will have no more issues. This 5-month long episode has been extremely damaging to Toyota’s hard-fought reputation for safety and reliability, and has caused many to wonder if Toyota sacrificed quality in order to push for being the world’s biggest automaker and meet growing demand in foreign markets like the US.
How deeply this safety issue will affect future car buyer decision to look at Toyota is unknown, but the quicker they can fix these issues and put this episode behind them the better. From an investor’s perspective, this will surely cause a dip in revenue and the longer factories sit with nothing to produce the worse the damage will be to the bottom line. One analyst at Deutsche Bank (DB) estimates that this will cost the company between $446 million and $502 million each week that sales are suspended. This comes on the heels of Toyota reporting a record loss of 436.94 billion yen in its fiscal year ended last March. Analysts’ estimates show the net loss narrowing considerably for fiscal 2010, but those estimates will clearly come down following this setback.
At Ockham, we downgraded Toyota to Overvalued in mid-December, but this stance had nothing to do with the ongoing safety concerns. The price had appreciated into the mid-$80s which was simply too high given their fundamentals of sales and cash earnings. Even though Toyota overtook General Motors as the world’s number 1, it was because Toyota’s sales were less bad, only falling 13% worldwide thanks to strength from Cash for Clunkers and the extreme weakness due to GM’s bankruptcy. This unprecedented suspension of sales for some of its most popular models only reaffirms our stance that TM would need to see its stock fall significantly in order for us to view this stock as is a good long term investment.