Pure-play EV stocks have generated a lot of buzz over the last few years, but many of these stocks are not profitable and trade at steep valuations. Investors would be wise to instead take a look at shares of the world’s leading automaker, Toyota Motors (NYSE:TM). Not only does Toyota enjoy a large lead at the top of the global auto market, but the company’s stock looks like a Strong Buy based on its attractive valuation and sensible EV strategy.
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Toyota: The Global Leader
The data is out, and Toyota retained its crown as the world’s largest automaker for the third year running, selling 10.5 million vehicles worldwide. The Japanese company continues to maintain a large gulf between itself and its challengers. Toyota’s 10.5 million vehicle sales were a fair margin better than second-place Volkswagen’s (DE:VOW) 8.3 million sales. 2022 was a challenging year for auto manufacturers because they had to deal with supply-chain issues and rising inflation, but Toyota maintained its 2021 sales levels, while Volkswagen’s total vehicles sold slipped by 7%.
A Sensible Approach to EVs
Many investors are excited about EV stocks and the worldwide transition toward electrification. However, it should be noted that this transition isn’t going to happen overnight — it will take many years. Even years from now, EVs will likely still make up just part of the global auto fleet. Many challenges remain — most developed countries lack the infrastructure for a fully electrified fleet of vehicles, let alone developing countries.
Toyota’s strategy looks sensible — rather than bet the farm on EVs, Toyota is taking a multi-pronged approach. The company is developing EVs while also maintaining its lead in ICE vehicles. It’s also providing other viable options like plug-in hybrids and hydrogen fuel cell vehicles.
Toyota’s research shows that a fleet consisting of both hybrids and EVs is as environmentally friendly as an all-EV fleet, even when assuming the power grid is entirely renewable, which it is not. Hybrid vehicles also need much smaller lithium batteries than purely electric vehicles, which is a cheaper and more environmentally-friendly option.
Toyota sells many vehicles in emerging markets, and outgoing CEO Akio Toyoda argues that developing markets in Asia are unlikely to make the switch to EVs any time soon. Even if these countries “go electric,” the EVs will be powered by a grid that relies on coal-fired power plants.
A New CEO is Coming In
Mr. Toyoda is stepping down and will be replaced by Koji Sato, who was previously an engineer at Toyota. While the transition in leadership to the younger Mr. Sato will likely pave the way for Toyota placing a higher priority on EVs, Mr. Sato acknowledges that “We have to take a 360-degree approach” to electrification. It seems likely that EVs will continue to be just one part of a diverse portfolio of vehicles. This mix will include hybrids and fuel-cell vehicles, giving Toyota a leg up in the developing world and beyond.
A Favorable Valuation
Despite its market leadership, shares of Toyota trade at an inexpensive valuation. Shares fetch a 9.9 times earnings multiple, which is far cheaper than the average multiple for the S&P 500 (SPX).
While Toyota is cheap compared to the broader market, it should be noted that shares trade at a premium to U.S. automakers like Ford (NYSE:F) and General Motors (NYSE:GM), which both trade at under 6.0 and 7.0 times earnings, respectively. However, I believe that all three of these stocks currently look attractive right now compared to the broader market.
Toyota looks even more attractive when comparing it to popular EV stocks. TM trades at just 0.9 times sales, while Tesla trades at 51.9 times earnings and 7.2 times sales. Toyota’s relatively cheap valuation comes into even starker contrast when comparing it to EV upstarts like Rivian (NASDAQ:RIVN) and Lucid (NASDAQ:LCID), which aren’t profitable but trade at price/sales multiples of 16 and 53, respectively. It’s hard to justify these companies having such premium valuations to the global leader in auto sales, which sells plenty of electric vehicles and hybrids around the world.
Is TM Stock a Buy, According to Analysts?
The two analysts covering Toyota on Wall Street are split, as one rates the stock a Buy and one calls it a Hold, giving it a Moderate Buy consensus rating. The average TM stock price target of $161.99 implies upside potential of 11.9% from the current price.
The Takeaway
I am bullish on Toyota because of its attractive valuation and its leading market position worldwide. Toyota’s diversified portfolio of vehicles looks like the right approach for a world of different needs in different markets. Shares trade at a discount to the broader market and look particularly attractive when compared to pure-play EV stocks. Toyota holds about a third of its market cap in cash and has a 2.7% dividend yield, further increasing its appeal.
