You Got It

Does it make sense to buy Toyota’s stock? Yes, at the right price. And we’re not that far away. Follow my logic.

No doubt about it. Toyota has stepped on a rake. Last November, it recalled 4.2 million vehicles. The problem? Ill-fitting floor mats that could interfere with the gas pedal. Three weeks ago, it recalled another 2.3 million vehicles in the United States. One week ago, 1.8 million vehicles were recalled in Europe. That’s a grand total of over 8 million vehicles recalled – almost as many as were sold in the United States in 2009.

Toyota’s stock (TM) has been getting hammered. It traded recently just shy of $92. As of this writing, it’s trading at $71 and change. And no wonder. While it’s too early to gauge the exact amount of direct recall costs, industry sources say it’s likely to come in somewhere between $1 billion and $3 billion. And that doesn’t include the costs of litigation, which is sure to follow.

Meanwhile, many investors are worried about Lexus, Toyota’s premium brand. Lexus has many components in common with Toyota. Oh, and Japan’s government has asked Toyota to test the brakes of its popular Prius hybrid for possible failure. Whew!

So how is Akio Toyoda, Toyota’s CEO and grandson of the founder, handling the crisis? By attending the World Economic Forum in Davos. You know, the convention for well-to-do blowhards. But Toyoda isn’t saying much. When cornered by a camera crew in Davos, he said, “We’re extremely sorry to have made customers uneasy.” And “We plan to establish the facts and give an explanation that will remove customers’ concerns as soon as possible.” Then he left the hotel. In a black Audi. Classic!

So, after all that, buying Toyota still makes sense? Stay with me.

Turf War

The turf war between Toyota and GM has been going on for years. Toyota surpassed GM as the largest automobile manufacturer in the world in 2009. Toyota undoubtedly will surrender some market share points this year and GM, among others, will benefit. But the most important turf war is taking place elsewhere.

As we’ve reported in Sound Profits, the middle class in emerging countries is the fastest-growing segment of the world’s population. It’s a long-term trend. China’s middle class is expanding dramatically. And, no surprise, they are buying cars. Government incentives helped, but last year China became the world’s largest car market, with sales of over 13 million vehicles (versus just 10 million in the United States).

No doubt the battle for automotive supremacy in the U.S. will continue to get headlines. But there’s no mistaking the fact that China, long term, will be the largest automobile market in the world. China has a population four times the size of ours. And while there are about 850 cars per 1,000 people in the U.S., there are only about 35 cars per 1,000 people in China.

With a population of 1.1 billion, India is another potentially huge market. Only 9 people in 1,000 own a car in India. Despite being the second-largest country in the world, India is the 11th-largest car market. That gap will close.

The long-term winners in the auto battle will be those that focus on the emerging markets. Because that’s where the growth is. One of the reasons I like Toyota is that they are well-entrenched in China and India.

Who Wins?

But you might not realize that if you simply looked at who sold the most vehicles in China last year. Believe it or not, it was GM. GM’s two joint ventures with the Shanghai Automotive Industry Corp. sold 1.7 million cars in China in 2009. And the top-selling brand was Buick! But as well as GM is doing in China, you can’t buy stock in the company. And don’t even think about buying MTLQQ! How about Toyota?

Toyota is well-positioned in both China and India. Last year, the company sold over 700,000 vehicles in China. In India, they already have one plant. And they’re building another one to produce a highly anticipated compact car for the Indian market. Production is expected by the end of this year.

Toyota isn’t going out of business. They have superior manufacturing capabilities. And some of the most popular car models in the world. Their international expertise and long-term perspective has served them well. And management has just gotten a wakeup call. A few years from now, this safety recall will be a small blip on the radar.

You Do!

One of the oldest investment maxims is to buy a quality company when it steps on a rake. Dow Chemical bottomed at $6 and change in December 1984. Right after the Bhopal, India pesticide plant explosion. If you bought on the bad news, you got rich. By September 1987, the stock was trading at over $21. Boeing traded in the $40s in 2008 on news of production delays with their Dreamliner. Boeing is now around $60. In 2008, Advanced Micro Devices traded down to around $2 a share as Intel grabbed market share. Investors who bought on the bad news were rewarded one year later when shares soared to over $10.

Start buying TM if it dips below $65 a share. There are several other automobile companies poised to profit from growth in the emerging markets. For more details, see Sound Profits.