“…Case in point, The Ford Motor Company. This company is blowing the doors off the business! 43% monthly sales gain. Stunning increase in market share from 14% to 17%. It just passed General Motors…

Yet how many times have you asked me about a different auto company in the “Lightning Round”, as right now I’m getting questions about Toyota almost daily. Are the short-term problems with Toyota an opportunity to buy the stock? I know that’s what you’re thinking. To which I say, how do I know if they are just short-term problems, for heaven’s sake? What if Toyota is a damaged company… This Toyota fiasco could be like the Audi sudden acceleration problem from a different era that gutted that firm’s reputation for years. If I were you, I’d sell Toyota, buy Ford.” — CNBC’s Mad Money 3/2/2010

Automakers recently released monthly sales reports for February, and as you might except given recent safety recalls and bad press Toyota Motor Co (TM) sales declined by 9% from a year ago.  Meanwhile, the primary beneficiary of that declining market share was Ford Motor (F) who saw sales improve by 43% over a year ago.  Admittedly, US auto sales were horrendous a year ago, but no company has made as much of a leap forward as has Ford under the leadership of Alan Mulally.

Jim Cramer has continually harped on his call to buy Ford’s preferred stock, which has turned out to be a very impressive call with those shares rising more than 700% in the last year, and as Cramer noted there is a dividend payout to be gained with the preferred share class.  Ford Motor’s common stock has also performed impressively, steadily gaining about 600% in the last year but with no dividend offered. 

At Ockham, we do not currently have research on preferred share classes, but it will come as no surprise following the stellar performance that our value-based methodology has Ford as Overvalued given the current fundamentals.  For instance, over the last ten years Ford has historically been priced by the market to deliver a price-to-sales per share metric of between .07x and .18x, but at this time the stock is trading well above that range at .36x.  Any investor can see that Ford is performing as well now is it has in quite some time, and sentiment on the stock remains bullish.  However, does that make it worth more than double the amount the market has typically been willing to pay for a given level of sales?  Maybe so, but it is clear to us that there are much cheaper stocks available.

As for Toyota Motor, we continue to have the stock as Overvalued but it is for different reasons.  The recent bad press has brought the stock tumbling from above $90 to the mid-seventies, but based on our methodology it may still have further to fall.  At this point price-to-sales are not a concern, but price-to-cash earnings currently stands at 19.7x while the historically normal range for TM is 8.7x to 13.3x.  The longer that this public relations nightmare continues the worse the effect on Toyota will be both in the short term and the long term.  This year’s financial results will take a hit, but also the damage to the brand is unknowable and has the potential to hurt future earnings.

On Tuesday, Cramer talked about whether or not viewers should consider taking profits in Ford and put them into Toyota’s stock.  His position is they absolutely should not, but value investors should consider dumping both stocks and finding cheaper alternatives which, according to our methodology, would not be difficult.

Toyota Motor Corp (TM) once again finds itself in the hot seat of a public relations challenge.  Yesterday, US Regulators announced that they would undergo a formal investigation on Toyota’s Corolla model years 2009 and 2010.  This puts yet another of Toyota’s most popular cars in the sights of a growing nightmare for the world’s largest auto maker.  To be clear, the investigation is not a recall, but if it were to lead to that it would affect about 500,000 cars.

Today another potentially damaging bit of breaking news hit the wires Thursday afternoon via Reuters, as a former lawyer for Toyota named Dimitrios Biller claims he has proof of an orchestrated cover-up where Toyota either systematically hid or destroyed legal evidence.  The House Oversight Committee panel charged with the investigation has subpoenaed some of the more than 6000 internal documents that the former employee took with him when he departed Toyota back in 2007.

Of course, one must consider the source, in this case a disgruntled former employee who has already filed suit against the automaker.  Just because he has alleged wrongdoing does not make it so, but if this is in fact true, it would make this sorted affair all the more damning to Toyota’s reputation.  Also, it might open the door to still more legal battles ahead, and maybe even criminal charges.  However, that will all take time to play out and it is all dependent on this former employee actually having some tangible evidence of a cover up.

As we noted when we first wrote about the recalls and their effect on TM stock (Toyota’s Stuck Accelerators Cause Investors to Slam on the Brakes), the short term impact of suspended sales and idling factors is certainly a cause of concern.  However, what is potentially more damaging is the reputation of quality and safety that Toyota worked so hard to attain now seems to be crumbling under their feet.  Even a hint of a cover-up could be very damaging to consumer perception.  At this point, our valuation remains negative or Overvalued on TM, and we would not touch these shares until all of the dust has settled which may take quite some time.

On Wednesday, we wrote that investors should stay far away from Toyota Motor (TM) following their unprecedented recall of 8 popular models (Toyota’s Stuck Accelerators Cause Investors to Slam on the Brakes).  Initial estimates predicted the recall could cost the company as much as $500 million each week until the problem is fixed, but the long term damage to the proud brand’s reputation is much more difficult to assess.  Edmunds.com is a leading authority in the auto market and has estimated the Japanese automaker’s sales results for the month of January to show a decline of 12% from a year ago.

That means the first serious nuts-and-bolts numbers from this debacle will come out Tuesday, when Toyota reports its monthly North American sales figures.

Edmunds.com is forecasting Toyota sales will tumble nearly 12% from a year ago, making it the only major car manufacturer to see a year-on-year decline while the industry overall is expected to post a 16% increase. To put it in perspective, Edmunds even sees General Motors’ sales going up 8.8% last month.

Toyota’s fall from December sales is likely to be even steeper, down 45%, compared with a 32% decline industry-wide. — MarketWatch.com 1/29/2010

Toyota stock fell 12.7% this week, and will likely fall further if a fix is not implemented very soon.  The supplier of the faulty part, a small auto-part manufacturer in Indiana, CTS Corporation (CTS) is said to be rushing the redesigned accelerator pedal to Toyota.  You can be guaranteed that Toyota will be working diligently to replace that part and repair their wounded reputation as soon as possible.  That being said, this episode will drag on beyond when the actual fix is implemented, as Congress has now gotten involved and is conducting  its own investigation of the events leading up to the recall. The probe will aim to establish if Toyota acted promptly enough to complaints of sticking accelerators in order to avoid further danger to consumers.

We are reiterating out Overvalued stance on both Toyota and CTS as of this week’s market close, and we believe there is far more downside risk than upside potential.  The redesigned parts are only part of the solution to this problem, and any findings of wrong-doing or a cover up would further damage the hard fought reputation for quality at Toyota.  We have no reason to believe there has been one, but again, we just see far too many risks in the weeks ahead.  This episode has been hugely expensive in the near term and may impact sales to a smaller degree for many months to come.

“We also have the bombshell recall for Toyota that people are talking about this morning. Toyota stopping sales and production for eight models, the cars being recalled because of this sudden unintended acceleration problem as they describe it…” — Fox Business Network 1/27/2010

Toyota Motor (TM) has pulled eight popular models from the sales floor as the company confronts serious safety issues in these models.  The world’s number one automaker will halt production of certain models starting next week, until they can straighten out their issues with sticky gas pedals in these cars that can make them accelerate without warning.  Last week, Toyota recalled 2.3 million vehicles for this same problem, and an even larger recall of 4.2 million vehicles occurred in September.  Clearly, the problem remains and the models affected include: the 2009-2010 RAV4, the 2009-2010 Corolla, the 2007-2010 Camry, the 2009-2010 Matrix, the 2005-2010 Avalon, the 2010 Highlander, the 2007-2010 Tundra and the 2008-2010 Sequoia. 

In the near term, investors are rightly worried about the company losing some of its most popular models that accounted for 65% of sales for the Toyota brand (the parent company also owns Lexus and Scion brands).  There is no timetable for getting these vehicles back onto the lots and ready for sales, as they will have to be absolutely sure the faulty accelerators will have no more issues.  This 5-month long episode has been extremely damaging to Toyota’s hard-fought reputation for safety and reliability, and has caused many to wonder if Toyota sacrificed quality in order to push for being the world’s biggest automaker and meet growing demand in foreign markets like the US.

How deeply this safety issue will affect future car buyer decision to look at Toyota is unknown, but the quicker they can fix these issues and put this episode behind them the better.  From an investor’s perspective, this will surely cause a dip in revenue and the longer factories sit with nothing to produce the worse the damage will be to the bottom line.  One analyst at Deutsche Bank (DB) estimates that this will cost the company between $446 million and $502 million each week that sales are suspended.  This comes on the heels of Toyota reporting a record loss of 436.94 billion yen in its fiscal year ended last March.  Analysts’ estimates show the net loss narrowing considerably for fiscal 2010, but those estimates will clearly come down following this setback.

At Ockham, we downgraded Toyota to Overvalued in mid-December, but this stance had nothing to do with the ongoing safety concerns.  The price had appreciated into the mid-$80s which was simply too high given their fundamentals of sales and cash earnings.  Even though Toyota overtook General Motors as the world’s number 1, it was because Toyota’s sales were less bad, only falling 13% worldwide thanks to strength from Cash for Clunkers and the extreme weakness due to GM’s bankruptcy.  This unprecedented suspension of sales for some of its most popular models only reaffirms our stance that TM would need to see its stock fall significantly in order for us to view this stock as is a good long term investment.

“This seems to be the quarter when automakers are turning in a better than expected numbers. As with many other automakers, here is what Toyota had today, a surprise profit in its quarterly earnings released early this morning, mid morning in Japan, a profit of $242 million that’s down 84% from the quarter a year ago. Sales, $50 billion, down 24%.

The thing to keep in mind with Toyota swinging to a profit is that it’s all largely based on government incentive programs around the world certainly helps. However, the strong yen continues to be a problem for it is offsetting the recovery that’s the reason why as Toyota was discussing its quarterly results, the company has said it has some concerns ahead of it. Toyota has cut its expected annual loss in half. Take a look at shares of Toyota. And again, like many of the automakers, benefiting from these incentive programs, boosting sales around the world. But Toyota has the added burden of the strong yen because it exports so many vehicles from Japan.” — CNBC’s Squawk Box 11/5/2009

Toyota Motor (TM), the world’s largest car company, joined Ford Motor (F) in reporting a surprise profit in the most recent quarter.  Toyota reported $232 million in profit following three straight quarters of losses thanks in no small part to government stimulus efforts around the globe.  Remember, during the U.S. Cash for Clunkers program, Toyota was one of the clear winners as their cars outsold all others. 

Toyota still expects to lose money in fiscal 2010 which closes in March, but they have improved their full year earnings guidance from a loss of $4.9 billion to a loss of $2.15 billion.  The better guidance is thanks to an improved sales outlook, which the company raised by 430,000 units to 7.03 million units.  Furthermore, the company continues to take steps to reduce costs in such notable ways as pulling out of Formula One racing.  These efforts are aimed at making the company leaner and hopefully profitable in a very uncertain environment.  Management cautioned that demand for autos would return slowly in many markets.  Additionally, the stronger yen cuts into profits from exports as Japanese made goods become more expensive in foreign markets.

When you consider the degree to which auto sales have fallen over the last year, it is pretty amazing that two of the largest automakers in the world were able to report quarterly profit.  Of course, the government stimulus that steered buyers towards the automotive sector has played a huge part in this, and the government gravy train has likely pulled away.  However, Toyota and Ford have gone to tremendous lengths in order to streamline operations and become more competitive.

We can applaud these automakers for their nascent turnarounds, but at this point we cannot recommend them as investments.  We recently downgraded Toyota to Overvalued because of there are still very significant challenges ahead.  The fact that Toyota may likely continue to deal with currency headwinds is just another concern, and one that Ford is not dealing with.  From a valuation perspective, the stock has begun to show progress, but the fundamentals have eroded so much over the past year that it is too expensive for us to recommend.