Toyota Rallies On Shareholder Votes, Cheap Sustainable Value

Key Points

• Shares of Toyota Motor are rallying after management announced its latest targets for the company's electric vehicles segment, as well as the re-election of Akio Toyoda into the board. 
• Based on these valuation multiples, the stock has proven to be severely undervalued, a short-lived event as the company approaches its ambitious targets riding on macro tailwinds. 
• Analysts may be targeting the close resistance range. However, management's capital allocation policies argue for a higher potential ceiling in the stock price.

Toyota Motor NYSE: TM behaves in a way that would showcase very little volatility to its stock price, as it is a mature and large capitalization business, which is at least the typical, expected behavior in the financial markets. Today, however, shares of Toyota are popping by as much as 4.2% in the trading session of Wednesday morning.

Despite carrying a 0.52 beta, implying that Toyota stock moves 0.52% for every 1% the S&P 500 moves, today's sentiment defies conventional volatility rules. As markets realize how cheap the stock is today, any positive news will amplify otherwise more minor and common price action. 

Even accounting for today's rally in the stock, Toyota is trading at historically low valuations, stuck in a channel that has persisted for over five years. Analyst ratings are pointing to softer upside potential targets. However, today's dividend yield provided by the stock and recent developments pointing to resilient shareholders and management practices could all mean a higher potential ceiling.

Following macroeconomic effects could point investors in the direction of demand for Toyota vehicles, one of the factors that can act as a catalyst to pivot market sentiment.

Toyota Rally On

Shares of Toyota completed a 12% rally as of this week, which would mark the most significant advance since March 2020 for the car maker. These increases are attributed to a few factors, firstly pointing to an ambitious tone from management as electric vehicle departments are discussed.

Analysts received eyebrow-raising statistics, which will be reflected in price target updates once they are adequately digested; management is pointing to Toyota's objective to sell 1.5 million total electric vehicles per year by 2026, raising targets to a further 3.5 million by 2030.

Today, a small - though growing - base of shareholders was looking to win the final vote in a proxy meeting. The board member and grandson of Toyota's founder, Akio Toyoda, has been re-elected to the company's board as the majority of shareholders did not share the same view as the activist minority.

Critiquing Toyoda's leadership, the thesis for voting him outcomes from the company falling behind in electric vehicle competitiveness, as Tesla NASDAQ: TSLA and BYD OTCMKTS: BYDDF have left the Japanese leader behind when it comes to market share in the niche. 

Considering that the stock reacted positively, Toyoda's leadership signifies more than just ambitious targets, as the underlying viewpoint could imply strength and character in his role. Despite investor confidence in Toyoda, reaching 1.5 million annual E.V. sales by 2026 is a big stretch in need of significant tailwinds to be accomplished. Despite these gaps, Toyota remains the world's largest car maker with undeniable fundamentals that seem to be underrated and still riding on soon-to-come macro tailwinds to converge this gap.

Toyota Upside Potential

Toyota analyst ratings point to a 9% upside potential from today's prices, with a top-side price target of $179.41 per share. Considering that Toyota's price-to-book value ratio, selling for 1.0x today, is severely compressed from its normalized historical ranges of 1.5x to 2.0x, investors could see a more reasonable 50% to 100% upside via the underlying valuation multiples.

The company's price-to-earnings ratio tells a similar story; sporting a 12.7x multiple today (even after the rally) would place Toyota significantly below its historical 15.0x to 18.0x ranges. 

As the company's free cash flow generation power grows, this same capital flow will trickle down to benefit shareholders via dividends or increased share repurchase programs. Today, Toyota's dividend yield stands at 2.3%, one of the highest in the peer group, enabled by the underlying company's reliable and expanding free cash flow generation abilities.

Management stated within its latest presentation that a new capital allocation policy would allocate up to 150 billion Yen toward buying back shares, typically the ultimate hint from management pointing to insider belief of undervaluation.

Toyota's chart will point to the stock approaching an essential level, where the price may pause before continuing to a further breakout. The $160 to $180 per share range has proven to be a heavily traded range in the past; however, with a reduction in the total amount of shares outstanding and bullish outlooks for the company, this range may only prove to be a consolidation before a continuation in the rally.