December 10, 2008 / 9:53 AM / 10 years ago

BUY OR SELL-Toyota, Honda; down, but not out

TOKYO, Dec 10 (Reuters) - Japanese auto stocks have been pummelled this year by a sharp global slide in car demand as consumers either put off buying big-ticket items or face tighter credit due to the financial crisis.

Toyota Motor Corp (7203.T), Honda Motor Co (7267.T) and other Japanese exporters are also suffering from a stronger yen JPY=, which hit 13-year highs in October.

Uncertainty over when the world’s economy, and car demand, will recover has been compounded by an even bigger question mark over the fate of the top three U.S. car makers, although a tentative deal to tide them over until 2009 may have been reached. [ID:nN09294627]

For a Graphic on Japanese automakers’ shares, click:



“This is not a buying time for either Toyota or Honda,” said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

“We’ve no idea how far the yen will advance. Also, if General Motors Corp (GM.N) actually goes into bankruptcy there could be some kind of demands made on Toyota. The whole issue of the Big Three is a big danger for the entire automobile industry.”

Japanese car shares rose on Wednesday on news that the White House and congressional Democrats had agreed in principle on a $15 billion proposal to bail out GM, Ford Motor Co (F.N) and Chrysler LLC. Toyota shares gained 6.6 percent to 2,930 yen, but are still less than half their 2008 high.

“Once there’s some more clarity on what will happen to the (U.S.) Big Three, it could be positive in the medium term for Japanese automakers,” said Goldman Sachs auto analyst Kota Yuzawa, who has a neutral rating on Toyota and Honda.

Yuzawa said that if the Detroit carmakers restructured and slimmed down their operations, that could alleviate overcapacity — seen as the biggest problem at the core of the U.S. auto industry.


Morgan Stanley auto analyst Noriaki Hirakata disagrees, saying now is a good time to buy Toyota stock.

“The reason we stress our ‘overweight’ rating on Toyota in such an operating climate is that we do not regard the company itself as a mature one,” he wrote in a report this week.

“Looking ahead to when the storm has passed, we think Toyota’s potential for growth is greater than capital markets anticipate ... Toyota’s solid financial position will support moves to enhance medium-term competitiveness.”

Hirakata is one of only two analysts in a Reuters Knowledge poll with an ‘overweight’ or ‘outperform’ rating on Toyota.

He has a price target of 3,800 yen based on a target EV/EBITDA of 5 times his estimates for 2010/11, against 4 times that the brokerage uses for the whole industry.

Goldman’s Yuzawa said another catalyst for a rebound in Toyota and Honda shares could be lower raw material costs coming through next year.

“Negotiations over steel prices will be in April-June, and the effect (of lower prices) would start appearing in July-September,” he said. “It’s impossible to say what sales would look like then, but at least we’ll have lower steel prices and easier comparisons for forex, too, meaning smaller percentage falls, or smaller losses.”

With that scenario in mind, Yuzawa said, investors could return to buy the shares when carmakers announce their 2009/10 profit guidance in late April to early May.

Yuzawa, who has a ‘sell’ rating on Japan’s third-ranked Nissan Motor Co (7201.T), said Toyota and Honda were not a ‘sell’ despite the current gloom because they were unlikely to fall into losses this year and damage their capital base.

“Their book value is under par, so there’s no need for aggressive selling,” he said.

Toyota and Honda both have a price-to-book ratio of under 0.8. (Additional reporting by Elaine Lies; Editing by Lincoln Feast)

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