Will Toyota Motor (TM) Take Tesla’s Crown as the EV King?

Tesla, Inc. (TSLA) gained significantly from the world’s shift to cleaner modes of transportation. Due to its first-mover advantage, the company became the highest-selling electric vehicle (EV) company in the United States. However, its edge has been cut short as traditional automakers like Toyota Motor Corporation (TM) are making rapid inroads in the global EV market.

TM was again the world’s top-selling automaker last year, selling more than 10 million vehicles. After achieving massive success in the internal combustion engine (ICE) vehicle segment, the Japanese automaker is transitioning from combustion engines to electric cars. During the first half of 2023, Toyota Motor North America sold 270,476 EVs, including hybrids, making up 26% of the total sales volume.

Moreover, the company sold 51,535 EVs in June, making up 26.4% of its total monthly sales. On June 13, 2023, TM held a technical briefing session, “Toyota Technical Workshop,” under the theme “Let’s Change the Future of Cars.” In the session, the automaker announced various new technologies to help it transform into a mobility company.

The company announced plans to sell 1.5 million EVs annually by 2026 and achieve carbon neutrality by 2050, aiming to reduce average CO2 emissions for the vehicles it sells worldwide by 50% or more by 2035 compared to 2019. TM also announced that it was evolving batteries with new technologies to power its next-generation battery electric vehicles (BEV) in 2026.

TM intends to enhance the performance of the popular liquid lithium-ion batteries by improving the energy density of square batteries. The next-generation BEV to be introduced in 2026 will have a cruising range of 1,000 kilometers (621 miles).

Additionally, the bipolar structure battery used in Hybrid Electric Vehicles (HEVs) is being adapted to the BEVs, helping the automaker provide customers with various battery options, from low-cost, popular batteries to high performance. However, the most prominent announcement from the company was that it was accelerating the development of solid-state batteries for BEVs.

Solid-state batteries are known to be more durable and long-lasting than traditional liquid lithium-ion batteries. The company is looking to mass produce such solid-state batteries to commercialize them by 2027-2028. Apart from batteries, the company also announced its plans related to hydrogen.
It is promoting external sales of fuel cells using Mirai’s hydrogen units, having already received offers for external sales of 100,000 units by 2030. The company also established a new organization called Hydrogen Factory which will make immediate decisions under one leader, from sales to development and production, all at once.

Furthermore, under its manufacturing axis, TM announced that it would start using Giga casting, a form of assembly-line automation under which the car body will be constructed from three main components in a new modular structure. Adopting giga casting will enable component integration, helping reduce vehicle development costs and factory investment.

Additionally, self-propelling production technology will reduce the processes and plant investment by half. For the first quarter, TM’s revenue came 7.2% above the consensus estimate. It sold 2.53 million Toyota and Lexus cars during the first quarter, rising 8.4% year-over-year, out of which 34% were hybrids and other electrified vehicles.

During its earnings announcement, the company said, “Sales volumes across all regions increased compared to the same period a year earlier due to productivity improvement efforts made together with suppliers.” The automaker maintained its operating income forecast of ¥3 trillion ($20.98 billion) for fiscal 2024. Also, its revenue is expected to come in at ¥38 trillion ($265.78 billion).

Here’s what could influence TM’s performance in the upcoming months:

Robust Financials

TM’s sales revenue for the first quarter ended June 30, 2023, increased 24.2% year-over-year to ¥10.55 trillion ($73.79 billion). The company’s operating income rose 93.7% over the prior-year quarter to ¥1.12 trillion ($7.83 billion). Its net income attributable to TM increased 78% year-over-year to ¥1.31 trillion ($9.16 billion). Also, its EPS came in at ¥96.74, representing an increase of 80.3% year-over-year.

Favorable Analyst Estimates

Analysts expect TM’s EPS for fiscal 2024 and 2025 to increase 602.4% and 0.5% year-over-year to $18.73 and $18.83. Its fiscal 2024 and 2025 revenue is expected to increase 2.7% and 2.7% year-over-year to $284.12 billion and $291.83 billion. Its revenue for the quarter ending September 30, 2023, is expected to increase 14.5% year-over-year to $71.26 billion.

Mixed Valuation

In terms of forward EV/Sales, TM’s 1.43x is 18.2% higher than the 1.21x industry average. Likewise, its 14.57x forward EV/EBIT is 3.5% higher than the 14.08x industry average.

On the other hand, its forward Price/Sales of 0.81x is 11.1% lower than the 0.91x industry average. Its 9.17x forward GAAP P/E is 44.2% lower than the 16.43x industry average.

High Profitability

In terms of the trailing-12-month net income margin, TM’s 7.72% is 84.3% higher than the 4.19% industry average. Likewise, its 12.62% trailing-12-month EBITDA margin is 18.5% higher than the industry average of 10.65%. Furthermore, the stock’s 9.23% trailing-12-month Capex/Sales is 184.9% higher than the industry average of 3.24%.

Bottom Line

TSLA’s dominance in the EV market is reducing as traditional automakers like TM are gaining market share. TM is serious about its electrification plans as it announced its ambitious EV strategy involving longer, more durable batteries, the use of Giga casting in its assembly lines, and its push to use hydrogen as an energy source.

TM’s long and successful history of making ICE cars, the company is likely to succeed in its EV endeavor. TM is also trading at a considerable discount to TSLA. Given its robust financials, favorable analyst estimates, and high profitability, I think TM is well-positioned to outperform TSLA.