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COMPANIES USED FOR THE REPORT: FORD vs TOYOTA

Submitted By: SayantaniNandy

For the purpose of this report, 2 companies in the same industry with the same end products were selected. This criterion makes comparison easier and effective as the companies have almost the same production process. The age of inventory and most of the other parameters are also in common.

Toyota Motor Corporation

Toyota Motor Corporation is a multinational company founded in 1937 and headquartered in Toyota, Aichi, Japan. Toyota was world's largest automobile manufacturer by production in 2010. In 1936 Toyota introduced

its first passenger car, the Toyota AA, after which the brand name “Toyoda” was replaced by “Toyota”. The

main markets are Japan and North America, but recently we can see a strong growth in Asian and South America markets. Toyota has three brands: Toyota, Lexus and Scion. Toyota is one of the first companies to start a hybrid cars production line (including leasing its technology to Ford). At present, hybrid Toyota - Prius line, represents approximately 73% of all hybrid vehicles sold in the U.S. In addition, Toyota announced its intention to manufacture electric cars with lithium-ion batteries “Toyota Plug-HV”. In 2009, the company had to withdraw from the market 3.8 million vehicles due to the acceleration system flaw and suffered losses of $ 3 billion in 2010. Ford used the opportunity to organize promotions, giving discount on a new car for customers who got rid of the old Toyota.

Global Financial Highlights: (source @ Toyota Official website)

Global sales decreased by 144,169 vehicles to 8.97 million, with strong sales in North America and

gains in Europe, offsetting decreases in Japan and other regions. Consolidated net revenues rose to 27.23 trillion yen (*$248.0 billion), up 6.0 percent

Operating income increased to 2.7505 trillion yen ($25.1 billion), up 20.0 percent and net income jumped to 2.1733 trillion yen ($19.8 billion), a 19.2 percent increase

(*all currency translations above are approximate and based on an average 109.8-yen-to-dollar exchange rate)

North America Financial Highlights:

Sales increased 185,775 vehicles to 2.72 million

Operating income (excluding valuation gains/losses from interest-rate swaps) increased to 537.9 billion yen (*$4.9 billion).

(*currency translations above are approximate and based on an average 109.8-yen-to-dollar exchange rate)

Fiscal Year Global Forecast (April 1, 2015 March 31, 2016):

Global consolidated vehicle sales is 8.9 million

Consolidated net revenue is 27.5 trillion yen (*$239.1 billion)

Operating income is 2.8 trillion yen ($ 24.3billion) and net income is 2.25 trillion yen ($19.6 billion)

(*all currency translations above are approximate and based on a projected 115-yen-to-dollar exchange rate)

Ford Motor Company

Ford Motor Company was founded in 1903 by Henry Ford. It is headquartered in Dearborn, Michigan, U.S. Ford is the second largest automaker in the U.S. and the fifth-largest in the world based on annual vehicle sales in 2010. Henry Ford designed his first moving assembly line in 1913. Each section of the production process was divided into component parts combining precision, continuity, and fast-pace thus starting mass-production. In Highland Park, Model T production reached record levels, every day a car came of the assembly line every ten seconds.It is the fourth-largest automotive company in the world in terms of sales selling cars on 6 continents. Car Brands include Ford, Mercury, Lincoln and Volvo. Since the mid-90’s Ford continually loses

significance in the American market and steadily increases its share in the European market owing to high labor costs in the U.S., high expenditure on healthcare in the U.S., strong trade unions in the U.S. (high pension commitments) and strong economic growth in lower combustion cars. Currently, Ford has four hybrid models, Ford Focus Hybrid being a direct threat to so far the most popular Prius (hybrid line of Toyota). Ford strongly suffered from a crisis on a real estate market as sales in the U.S. were strongly associated with the property market. Ford then changed strategy with less emphasis on creating demand and more emphasis on quality and safety.

 Pre-tax profit of $1.4B, up $24M from last year 23rd consecutive profitable quarter After-tax earnings
Pre-tax profit of $1.4B, up $24M from last year
23rd consecutive profitable quarter
After-tax earnings per share of 23 cents, excludingspecial items, down 2 cents compared with a year ago
Net income of $924M, or 23 cents per share,down $65M or 1 cent compared with a year ago
Automotive operating-related cash flow positive;cash and liquidity in line with targeted levels
Wholesale volume and Company revenue downdue to major product launches and the impact ofthe
strong U.S. dollar on international revenue
North America, Asia Pacific andMiddle East & Africa profitable
Three of 15 global new product launches complete;remainder on track
Strong profit at Ford Credit
Continued Lincoln growth in China
Confirmed commitment to the Russian market
Inaugurated assembly plant in Hangzhou, Chinaand assembly and engine plants in Sanand, India
Raised first quarter dividend by 20 percent to15 cents per share
 Company reconfirms 2015 pre-tax profit guidance of$8.5B to $9.5B; improves North America
operatingmargin guidance to 8.5-9.5 percent and revises South America profit guidance down in light of
external environment

Stocks performance comparison

The year of 2014 did not start so well for the car stocks (with the exception of Tesla (NASDAQ:TSLA), which many fans consider more of a technology stock than a car stock) after they had a great time between the summer of 2012 and fall of 2013. During this period, Ford (NYSE:F) jumped from $8s to $17s and Toyota (NYSE:TM) jumped from $75 to $135. When the rally of the car industry was the hottest (around last fall), many people were going crazy and claiming Ford would see prices like $30, $40 or even above within a year. Now the rally seems to be over but all the analysts pushing these stocks have disappeared.Toyota Motor Corp (ADR) (NYSE:TM) stock has handily trumped the S&P 500 over the last year, with its 30% advance more than doubling the 14% return of the S&P.Toyota is growing sales at a faster pace in 2015 than any of its big-name rivals, with sales up 10.5% year-to-date. Consider its competition: General Motors Company (NYSE:GM) has seen a 5.3% YTD rise, Ford Motor Company (NYSE:F) sales are up a measly 2% from 2014, Honda Motor Co Ltd (ADR) (NYSE:HMC) sales are up 2.6% thus far in 2015, Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) has moved 3.6% more units so far this year. If these trends continue, the TM stock price shouldn’t have much of a problem continuing its rally. The second catalyst driving TM stock higher is an equally macro-level factor: exchange rates. With the U.S. dollar soaring, foreign carmakers enjoy huge cost

benefits as they’re able to manufacture cars at a lower input cost than their American competitors. The U.S. dollar has strengthened 35% against the Japanese yen in just three years.That advantage is so significant it’s gotten Ford executives asking for international currency manipulation rules. Bloomberg reported in January that

Ford CFO Bob Shanks estimated the massive currency fluctuations“…gives Japanese automakers as much as $11,000 more profit per car and allowed Toyota Motor Corp. to earn an extra $10 billion in 2013.”Toyota also

has big plans to expand in China, the world’s single largest auto market. Specifically, TM plans to drop two hybrid cars in China later this year, which could help the notorious polluter reduce its carbon footprint.The good

news for TM stock is that Toyota has plenty of credibility in creating low-emission vehicles. Its Toyota Prius was the first successful mass-market hybrid car, and it even plans on releasing a hydrogen car, the Toyota Mirai, in 2015.While the Mirai won’t be an instant game-changer for TM stock, it poses a very real threat to Wall Street darling Tesla Motors Inc (NASDAQ:TSLA) and its efforts to steer consumers away from gas- guzzling traditional cars. The comparison of F and TM stocks are attached herewith:

news for TM stock is that Toyota has plenty of credibility in creating low-emission vehicles. Its

Analysis of Financial Statements (See appendix for statements)

Current stock price is used as a critical input into the analysis. This is done by using a uniform discounted cash flow model and adjusting the numbers to generate current stock price. While the story around the company can be great, it does not immediately follow that the stock price will go higher. In order for that to happen, expectations have to get better than what current price reflects. Below are tables showing a stock price sensitivity analysis for both companies, comparing EBITDA margins to revenue growth rates. Note that the highlighted portion of each table represents a range of prices based on average trends.

Ford:

news for TM stock is that Toyota has plenty of credibility in creating low-emission vehicles. Its

Toyota:

Both stocks appear to be discounting margins worse than their past performance justifies.From this perspective, Ford

Both stocks appear to be discounting margins worse than their past performance justifies.From this perspective, Ford now appears to be a better stock. The company's current margin performance could justify a price close to $40. However, that is not the end of the story. How a company redeploys capital and invests in its business is a critical variable in both corporate performance as well as stock performance. Generating cash from sales is one thing, but making the critical investments so the company is in a position to continue it, is another. Practically, here is where the conversation moves from a company's income statement to its balance sheet. We are interested in sustained free cash flow. The only way a company can sustain anything is by making the necessary investments which accumulate on its balance sheet. Toyota has operated with a much higher capital intensity (and much closer to the industry) with 7% of revenues versus Ford's 4%. It does not seem feasible that Ford maintains its current market share and production levels given this relatively low level of capital expenditures. In a nutshell, for Ford's stock to move higher, its capital intensity has to remain below the competition. In a competitive, and capital intensive business, this seems pretty unlikely.

On the other hand, Toyota appears to be largely ignored. The current stock price is discounting below average margins, and average to high capital intensity. One interpretation of this analysis would be to say the market anticipates most of the companies' EBITDA margins to be in the 11% range, except for Toyota's. This is despite the company having a track record of doing much better (in contrast to F). As a result, it seems reasonable that Toyota keeps pace with expectations for the overall industry, and doing so leads to a higher stock price. In fact, looking at the above table, it is possible the stock doubles from its current value without much change in its margin performance or historical growth trends. Current market price can be justified with COGS around the five-year average of 80%, despite the fact that Toyota is working closer to 77% level. Additionally, there is no doubt management can operate at these levels because they have done it before.

Conclusion

In conclusion, the expectations appear to be the lowest for Toyota, giving the stock the most upside. Said another way, because the expectations are already low, the stock probably has the least downside risk and a lot of upside optionality.

Peer comparison

Industry Peers 5-Yr Dividen Rev Med Interest Market Net d CAGR O per. Coverag Cap Mil
Industry Peers
5-Yr
Dividen
Rev
Med
Interest
Market
Net
d
CAGR
O per.
Coverag
Cap Mil
Income Mil P/S
P/B
P/E
Yield%
%
Margin%
e
D/E
Ford Motor Co
54,132
4,770
0.4
2
11.4
4.4 1.7
4.4 6.4
4.1
Toyota
Motor Corp (USD,JPY)
212,770
2,304,614
0.8
1.5
10.4
2.9
7.5
127.5
0.6
Toyota
Motor Corp (USD,JPY)
211,351
2,304,614
0.8
1.5
10.3
2.9
7.5
127.5
0.6
Daimler AG (USD,EUR)
87,156
7,713
0.5
1.6
10.3
3.3
7.8
12.5
1
Daimler AG (USD,EUR)
87,135
7,713
0.5
1.6
10.3
3.2
7.8
12.5
1
Volkswagen AG (USD,EUR)
71,716
6,165
0.3
0.7
10.9
3.6
6.1
0.8
Volkswagen AG (USD,EUR)
71,502
6,165
0.3
0.7
10.9
3.6
6.1
0.8
Volkswagen AG (USD,EUR)
67,920
6,165
0.3
0.7
10.4
3.8 —
6.1 —
0.8
Bayerische Motoren Werke AG (USD,EUR)
67,454
6,107
0.7
1.5 11
3.2
9.1
10.4
20.4
1.2
Bayerische Motoren Werke AG (USD,EUR)
67,443
6,107
0.7
1.5
10.9
3.2
9.1
10.4
20.4
1.2
Volkswagen AG (USD,EUR)
67,078
6,165
0.3
0.7
10.2
3.9
6.1 —
0.8
Honda Motor Co Ltd (USD,JPY)
57,150
548,089
0.5
1
12.7
2.3
5.3
45.3
0.6
Honda Motor Co Ltd (USD,JPY)
56,591
548,089
0.5
1
12.6
2.3 —
5.3
45.3
0.6
General Motors Co (USD)
53,765
5,408
0.4
1.6
12.7
3.8 3.1
3.3
11.5
1.2

Bayerische Motoren Werke AG (USD,EUR)

51,902

6,107

0.5

1.2

8.4

4.2

9.1

10.4

20.4

1.2

Nissan Motor Co Ltd (USD,JPY)

42,773

546,157

0.4

1.1

9.5

3

7.6

5.1

24.6

0.8

Nissan Motor Co Ltd (USD,JPY)

42,564

546,157

0.4

1.1

9.5

3

7.6

5.1

24.6

0.8

Hyundai Motor Co (USD,KRW)

38,539

7,346,807

0.4

0.8

4.5

2.7

-1

9.5

34.1

0.7

Audi AG (USD,EUR)

32,680

4,465

0.5

1.5

6.7

0.6

12.5

10.1

21.9

0

Fuji Heavy Industries Ltd (USD,JPY)

32,026

345,334

1.2

3.3

11.4

2.2

9.9

136.1

0.1

Fuji Heavy Industries Ltd (USD,JPY)

31,215

345,334

1.2

3.2

11.1

2.2

9.9

136.1

0.1

Renault SA (USD,EUR)

29,715

2,537

0.6

1

10

2.1

4

1.6

5.3

0.2

Tesla Motors Inc (USD)

28,419

-675

7.3

21.6

-95.4

-1.8

1.5

Renault SA (USD,EUR)

28,129

2,537

0.6

1

9.5

2.2

4

1.6

5.3

0.2

Hyundai Motor Co (USD,KRW)

24,551

7,346,807

0.2

0.5

2.9

2

-1

9.5

34.1

0.7

Fiat Chrysler Automobiles NV (USD,EUR)

23,091

500

0.2

1.5

35.9

15

1.8

2.2

Industry Average

26,932

646,823

0.5

1.6

13.4

2.6

8.5

-382.6

113.9

1

1

Changes in financial position(Ratio Comparison, see appendix)

Return on Assets (ROA) comparison between Toyota and Ford: ROA is an indicator of how profitable a company is relative to its total assets. In addition, ROA gauges how efficient management is at using its assets to generate earnings. As shown in the chart Toyota has outperformed Ford during each of the five year being analyzed.

Current Ratio comparison between Toyota and Ford:Current ratio is a balance-sheet financial performance measure of a company's liquidity. A current ratio of more than 1 indicates that a company's current assets exceed its current liabilities. As show by the ratios in the chart, Toyota's current asset is approximately equal to its current liabilities. Whereas Ford's current assets is equal to approximately half of its current liabilities. Again Toyota has the more favorable ratio between the two companies.

Debt to assets between Toyota and Ford: The debt to asset ratio shows the proportion of a company's assets which are financed through debt. If the ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's assets are financed through debt. Companies with

high debt to asset ratios are said to be "highly leveraged," and could be in danger if creditors start to demand repayment of debt. Toyota has lower and more favorable ratio between the two companies.

Total Asset Turnover comparison between Toyota and Ford: Total asset turnover measures a firm's effectiveness at using its assets in generating sales, the higher the number the better. Companies with low profit margins typically tend to have high asset turnover, while those with high profit margins typically tend to have low asset turnover. Toyota holds a slight edge over Ford in this category.

Analysis of Operation:

The world has witnessed a constant transformation as regards the automobile production/operations philosophy. The Ford's mass production (produce to stock) philosophy received ample appreciation and was convicted to be the right path by most other manufacturers (1914). This has been evidenced by the way the Big Three, (Ford Motors, General Motors and Chrysler) flourished during early and mid-20th century. But the onset of Toyota production system, which is based on the philosophy of "lean manufacturing", started sending tremors into the well complacent American automobile industry's regime. The principle of Toyota Motor Company (TMC) to eliminate wastes and subsequent TMC's success attracted other manufacturers who tried to copy, but in vain.

Analysis of Competitive position

high debt to asset ratios are said to be "highly leveraged," and could be in danger

Analysis of Product Lines:

I chose to compare these two mainly because some automobile experts have been comparing their latest

I chose to compare these two mainly because some automobile experts have been comparing their latest models suggesting that they quite belong in the same class.As the chart above shows, as of 2008, U.S. sales of Ford Fusion were nowhere near that of Toyota’s (TM) Camry. Interestingly enough, Ford’s Fusion sales grew impressively during the recession, while Camry sales dipped significantly. Sales of Toyota’s Camry didn’t decline because something was inherently wrong with the model. It was just the trend in the automobile industry at the time. This shows that Ford actually made a tweak during the recession that boosted its business. That tweak was to improve the design of Fusion and make it more fuel efficient. In fact, Fusion 2010 was the most fuel-efficient mid-size sedan in the world. Considering that high oil prices contributed to decline in auto sales in 2008, it was obvious that consumers were ready to trade in gas-guzzlers for fuel efficiency. However, while making the Fusion more fuel efficient, Ford ensured that it has since continued to improve both the design and fuel efficiency of the Fusion. As a testament to this, the Fusion 2015 (non-hybrid) is more fuel efficient than the Toyota’s 2015 Camry (non-hybrid). This wasn’t the case in 2008. The image below sums it all up.

I chose to compare these two mainly because some automobile experts have been comparing their latest

Conclusion and recommendation

To conclude, it makes more sense looking at all the above analysis that market has more faith on Toyota stock though Ford can also generate comparable returns in the long run. I have included some valuation information to conclude the report.

Conclusion and recommendation To conclude, it makes more sense looking at all the above analysis that
Conclusion and recommendation To conclude, it makes more sense looking at all the above analysis that