Toyota motors ahead

A falling yen and stronger Japanese economy help share prices of the automaker to their highest levels in years.

By Jim J. Jubak May 17, 2013 6:25PM

Toyota cars on display in showroom
© Tomohiro Ohsumi/Bloomberg via Getty ImagesToyota Motor (TM) blew through my $120 target price on May 10 and kept going. The New York traded ADRs (American Depositary Receipts) traded at $127.26 just before the close on Friday.

As of Friday, I’m increasing my target price to $151 for the ADR. Toyota Motor is a member of my Jubak’s Picks portfolio. This stock pick is up 28.7% since I added it to the portfolio on February 5, 2013.

I added Toyota Motor 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 Friday's close of 103.24 to the dollar isn’t the near the end of the drop in the yen. The consensus on Wall Street is 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 Motor 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 Motor 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 102 -- then Toyota will add another 150 billion yen (or $1.5 billion) to the 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.

The third reason to hold onto Toyota Motor at this point is that it looks like sometime in calendar 2013 the company will exceed its target cash position of 5 trillion or 6 trillion yen.

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.

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