Toyota stalling before earnings

TM stock has seen a drop recently, and that may continue after a May earnings report and the recent recall

By Louis Navellier Apr 22, 2010 11:36AM

Toyota TM stock pick by louis navellierToyota (TM) has come under fire recently on continued coverage of its brake recall, big incentives to boost TM sales and rumors of a Toyota dividend cut.

Some investors are fleeing this stock like a rat from a sinking ship, while others want to buy Toyota while TM stock is cheap.

So what should you be doing? Well a look at the fundamentals behind Toyota shows that the smart thing to do is park this stock and walk away. Let’s look at some of the facts behind TM stock and what it means for investors:

Performance: Ouch! That's the best way to describe the drop in stock price for Toyota Motor from its January high of $91.78 to its low of $71.78 just two weeks later. News of the largest recall and highest-ever fine in auto-maker history due to dangerous acceleration reports on its vehicles were the culprits.

These days, the stock is trading in the high $70s and many investors are wondering if now's the time to buy. After all, Toyota shares are still below their 2007 pre-market crash of $100 per share.

Sales:  Car sales fell 13% in 2009 as a whole for the company. And that was before the massive recalls and the more recent news that the company was suspending sales of the 2010 Lexus GX 460 after Consumer Reports magazine urged buyers not to buy the sport utility vehicle, calling it a "safety risk" that could roll over.

Like all auto-makers, Toyota is doing its part to offer buyers special incentives to purchase from its family of vehicles. As a result, first-quarter sales are up 40% year-over-year for the company with an especially strong March showing. It’s also worth noting that margins could get pinched as Toyota offers huge incentives to reassure wary consumers.

Earnings: While sales may be on the upswing for now, my screens are showing the stock still has a ways to go. Toyota has to deal with the cost of the more than 8.5 million cars under recall. The company recently announced it expected a $2 billion hit in its operating profits as a result of recall repairs on tap.

Analysts will be watching upcoming earnings closely for the resulting impact. In its most recent quarter, Toyota reported earnings of $1.09 per share. This topped the $-0.05 consensus of analysts covering the company. But analysts are still rating the upcoming average earnings estimates at -0.45%.

‘Quant’: In the United States, Toyota is particularly in the hot seat, with pending class-action law suits, hearings before Congress, and so far, non-stop recalls. Its reputation is tarnished and they have a long road ahead to regain the trust of the American public.

The sticking point is trying to gauge just how long that's going to take. As a result, individual and institutional investors alike are steering clear of the stock -- at least, according to my proprietary quantitative screens. And from conversations with regular folks who make up Toyota’s customer base, there’s a real feeling that Toyota could be the next Yugo. There just is not a sufficient amount of buying pressure to support the stock as a good investment.

The Verdict: Without sufficient buying pressure and with questionable fundamentals, I would drive your Toyota shares to the lot and trade them in for a new model. You should not buy or be holding shares of this auto giant in the near-term.

It's stunning to think that just two years ago, Toyota could boast the title of the world's most profitable car maker, but that’s not the case right now. This mighty giant has fallen hard. I won’t go so far as to say the stock is down for the count -- which I am more than willing to say about Chrysler!

I have no doubt Toyota is going to put up one heck of a fight to reclaim its former glory. But the fact is that the short-term would be bumpy so a sale is the smart move.

As of this writing, Louis Navellier did not own positions in any of the stocks mentioned here.

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