Why Toyota’s share price keeps motoring upwards

Toyota’s [7203.T] share price has remained unfazed by the global semiconductor shortage that has squeezed automakers’ supply chains in the first half of 2021. 

Since the start of the year through 24 June, Toyota’s share price has gained 25.5% and 54% in the last 52 weeks. As of 24 June, Toyota’s share price has risen 11.2% throughout the month so far.

Buoyed by the company’s electric vehicle plans and strong sales, Toyota’s share price surpassed JPY10,000 on 16 June for the first time in the stock’s history. The milestone led to the company thanking investors at its annual general meeting (AGM), held on the same day.

“It could be accidental that our share price topped JPY10,000 as we prepared for the meeting, but we were so much encouraged because of it” - Akio Toyoda, president and CEO of Toyota

 

“It could be accidental that our share price topped JPY10,000 as we prepared for the meeting, but we were so much encouraged because of it,” Akio Toyoda, president and CEO of Toyota, said, according to Reuters. 

Since peaking at an all-time high of JPY10,330 during intraday trading on 16 June, Toyota’s share price has pulled back slightly. As a result, the stock closed on 24 June 4.9% lower at JPY9,824. 

 

Crunch time?

The recent rally in Toyota’s share price has been partly driven by how well it has weathered the global chip crunch.

Toyota’s revenue for the fiscal year that ended 31 March 2021 decreased by 8.8% to JPY27.2145trn (circa $250bn). Total vehicles sold depreciated from 1.309 million units to 7.646 million units. Net income dropped from JPY2.2452trn ($20bn) to JPY2.0361trn ($18bn). 

Although the coronavirus pandemic dented demand for new cars in the early part of the fiscal year, Toyota rebounded strongly. Profit for the fourth quarter was JPY777bn ($7bn), more than double the JPY327bn ($2.97bn) reported for the same period a year earlier. Revenue for the three months from January to March rose nearly 12% from JPY6.9trn ($63bn) to JPY7.7trn ($70bn), according to data by Zacks Equity Research. 

  

One of the main reasons for the turnaround has been the minimal impact the chip crunch has had on vehicle production. The catastrophe is expected to cost the global automotive industry $60bn in lost revenue this year. 

Like all automakers, Toyota uses a just-in-time production model, whereby parts are ordered as close to production as possible to keep manufacturing lean. However, unlike nearly all automakers, Toyota was prepared for the current disruptions because of the lessons learned during the aftermath of the Tokohu earthquake and tsunami in 2011. These included the need to optimise inventory levels and strengthen communication channels with suppliers. 

“Toyota's limited exposure to the shortage illustrates its highly resilient business model, particularly the quality of its supply chain management,” wrote Fitch Ratings back in February.

While the chip shortage is expected to last into 2022, possibly 2023, Fitch Ratings expects neither Toyota, nor its Japanese rival Honda [7267.T], to be majorly affected, thanks to their financial stability.

For the 12 months through 31 March 2022, Toyota forecasts that it will shift 8.7 million vehicles, a year-over-year increase of 14%. Revenue is expected to grow by around 10% to JPY30trn ($270bn), while net income is expected to be JPY2.3trn ($21bn).

“Toyota's limited exposure to the shortage illustrates its highly resilient business model, particularly the quality of its supply chain management” - Fitch Ratings

 

A self-driving play?

Can Toyota’s share price find a new support level above JPY10,000 in the short term?

In May, Takaki Nakanishi, a Jefferies analyst and CEO of Nakanishi Research Institute, raised his price target to JPY10,000 from JPY9,200. He believes Toyota’s share price has the potential to grow stronger this year. 

In a note seen by Reuters, Nakanishi praised the automaker’s expanding list of partnerships. The company is “moving a step towards realising its goals” in self-driving technology, for instance. Notably, and most recently, Toyota’s subsidiary Woven Planet Holdings announced it would be acquiring ride-hailing company Lyft’s [LYFT] Level 5 autonomous vehicle division for $550m. 

Toyota has also doubled down on its belief that going fully electric isn’t the future of mobility — at least not for now. The automaker is a big supporter of both hydrogen fuel cells and hybrid vehicles. 

“It shouldn't be about rejecting hybrids and gasoline cars and only selling fuel cells and battery-electric cars. We want to expand the choices available in the path to carbon neutrality” - statement by Toyota

 

“It shouldn't be about rejecting hybrids and gasoline cars and only selling fuel cells and battery-electric cars. We want to expand the choices available in the path to carbon neutrality,” Toyota told Automotive News in May.

Also speaking to the publication, Nakanishi argued Toyota had taken this step “to save Japan's auto industry and its domestic supply chain”.

The First Trust Nasdaq Global Auto Index Fund [CARZ], which provides exposure to the Japanese automotive industry, has a year-to-date daily total return of 17.57%, according to Yahoo Finance data.