Toyota Remains in the Driver's Seat

05/17/2013 4:59 pm EST


Jim Jubak

Founder and Editor,

Here are three reasons why the yen depreciation will continue to keep Toyota rolling, writes MoneyShow's Jim Jubak, also of Jubak's Picks..

Toyota Motor (TM in New York and 7203.JP in Tokyo) blew through my $120 target price on May 10, and kept going. The New York-traded ADRs traded at $127.26 just before the close on May 17.

As of May 17, I'm increasing my target price to $151 for the ADR. Toyota is a member of my Jubak's Picks portfolio, up 28.7% since I added it to the portfolio on February 5.

I added Toyota to this portfolio as a way to play the decline in the Japanese yen being engineered by the Bank of Japan and the Abe government in Tokyo. My reason for holding onto this position and increasing the target price is my belief that the yen, at today's close of 103.24 to the dollar, isn't near the end of its drop.

The consensus on Wall Street is that we're headed through 105 to 110 by the end of the year. I think that's conservative, and that we're likely to see 120 or so by the end of 2013. But whatever your exact year-end target, a falling yen moves Toyota higher in three ways.

First, the depreciation in the yen will lead to increased profits, as Toyota sells more cars to customers in non-yen economies and then brings those stronger currency sales receipts home for translation back into yen.

In its March 2013 quarter, the fourth quarter of the company's 2013 fiscal year, Toyota reported a 159% increase in net profit. For the 2014 fiscal year that ends in March 2014, the company projects that net income will climb 42%.

Second, Wall Street and Toyota itself will push the share prices higher, as they move the assumptions for the yen from the current neighborhood of 90 to 95 to the dollar to 100 or higher.

Toyota's projections for fiscal 2014, for example, assume that the yen will trade at 90 to the dollar. Of the 1394 companies that had reported for the March quarter as of early May, the average assumption was for the yen to trade at 90.

If instead, you assume 100 yen to the dollar and not 95 in your model—a reasonable assumption, since the yen now trades at 103—then Toyota will add another 150 billion yen (or $1.5 billion) to their profit from overseas operations, Credit Suisse projects. When Wall Street analysts lag like this, they wind up gradually raising target prices, which does indeed push stock prices higher.

Third, it looks like the company will exceed its target cash position of 5 trillion or 6 trillion yen sometime in calendar 2013. Toyota Motor's cash position was already at 4.6 trillion yen at the end of March. If the company accumulates more cash than the target, as seems likely, shareholders could well get a bump up in the current 1.9% dividend.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Toyota Motor as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund's portfolio here.

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