Toyota Motors Corporation’s Valuation of Stock

Introduction

Toyota Motors Corporation is one of the leading motor manufacturers in the world. The company headquarters are based in Toyota city in Japan with various subsidiaries of the company spreading across the globe. The major areas of operations of Toyota motors are the production of luxury cars with their brands taking the largest share of the luxury cars industry. This is considered to be the case due to the advanced technology that the company uses to produce its vehicles.

The vehicles are considered to be economical in terms of their costs and also in terms of fuel consumption and maintenance. In addition to this, Toyota Motor Corporation also produces other heavy vehicles such as buses, trucks, and folk lifts. The company also has a section that deals with the production of heavy industrial vehicles.

The company has also perfected the production of low-end private vehicles. These are vehicles that are aimed at providing the middle-income earners a chance to own cheaper, but more efficient vehicles for their private use, or for business. These include vehicles such as Toyota Allion, Toyota Corolla, Toyota Wish, Toyota Succeed, and Toyota Prius among many other brands.

Toyota Company was established in 1933 by Kiichiro Toyoda in a garage that was owned by his father. The established company was registered as Toyoda and had the objective of producing vehicles that would be efficient in fuel consumption. However, it was not until 1935 that their first prototype was produced.

The change of name from Toyoda to Toyota took place in 1937 with the formulation of the strategy that sought to diversify products from the company to include small vehicles (Monks, Robert and Nell, Minow 581). The main aim of this strategy was to reduce the degree of direct competition between the company and other automakers in Europe and the United States of America that were producing heavy vehicles.

The first small car prototype from Toyota came into existence in 1947. Due to financial challenges that faced Toyota in 1949 and the danger of bankruptcy that the company faced, Toyoda decided to step down as the head of the company. The company leadership was then assumed by Eiji Toyoda and Saito who decided to invest in efficient production facilities that would help the company to produce sophisticated vehicles at relatively lower costs than before.

Some of the first models produced by Toyota between 1970 and 1980 included Celica, Tercel, and Camry which became popular models in the market. Toyota became a leading player in the motor industry in 1980 when it was ranked as the second-largest motor maker in the world after general motors. Toyota also worked with the general motors company in the establishment of the production plant in the United States of America.

With diversification into the production of expensive vehicles, Toyota has produced leading models such as Toyota Prado, Toyota Rav4, and Lexus among others. Toyota operates on the principle of just in time which has enabled the company to meet demands of their clients better than their competitors. They also have an advanced research and development department which has enabled this company to advance their motor vehicle technology.

Growth Investment versus Value Investment

Growth investment involves the process through which an investor formulates investment strategies aimed at identifying and investing in high growth rate investments. This investment must exhibit characteristics of higher growth as compared to the industry or the market in general. The main focus for a growth investor therefore, is the stock that enjoys high price earning ratio, instead of focusing on dividend yields.

On the other hand, value investment involves the formulation and execution of strategies that are aimed at identifying and investing in the shares that have a higher intrinsic value as compared to the market price of the share (Montier, James 354). Therefore, the focus of the value investor is the dividend yield. To achieve this objective, the investor must look for shares that are undervalued. Such information is available in the financial statements of quoted companies.

The most important financial ratios for the value investor therefore, include price earning ratio, price to sale ratio and price to book ratios. In this case, the value of the stock can be derived from the slow growth of the industry or company and low valuations of company shares. Unlike growth investors, value investor tend to disagree with the propositions of market efficiency hypothesis which argues that the prices of shares reflects all information in the economy. Therefore, these investors rely more on their personal judgements in making investment decisions rather than the information provided by financial markets.

Growth investors take a short term investment perspective with the belief that the growth of their investments are bound to take place soon due to the growth of companies where their investments are based (Damodaran, Aswath 677). Therefore they hold stock with the aim of offloading them as soon as their value increases.

On the other hand, value investors take along term investment perspective. This is based on their belief that the intrinsic value of a given stock will continue to rise with time if the investment is done in a slow growing company. The aim of the value investor is to hold the stock for the longest time possible until intrinsic value of the stock is maximised.

In terms of their risks preferences, growth investors have a high tolerance rate for risk. This explains why they are ready to speculate in the financial markets. They also try to seek new companies in the industry which they believe are likely to experience enhanced growth within a short period of time. However, value investors are risk averse. They believe in the companies that have an established history of financial performance in the industry and try to avoid investment in the industry that are likely to experience a rapid growth over a short period of time.

This is because a rapid growth may affect the intrinsic value of an investment in a negative way (Hoover 431). Absolute returns are considered important by this type of investors who also consider preservation of capital to be important. However, the growth investors consider growth rate changes to be important and remain content with relative performance that is considered to be superior.

Intrinsic Value Determination

A share traded in a financial institution will have two types of values. The first type is the value the value that is determined by the market forces of demand and supply, while the other value is the intrinsic value that can include the discounted values of all cash-flows generated by that particular share. As opposed to the growth investor, the value investor will be more interested with the intrinsic value of share. To determine this value, the first step involves identification of an appropriate discounting rate, k, through which all cash-flows must be discounted. The dividend discount model below can be used to determine the intrinsic value of the share;

IV=D1/(1+k)+D2/(1+k)2+ D3/(1+k)3……+ Dn/(1+k)n, where IV refers to the intrinsic value, D is the dividend paid and k is the discounting factor.

An investor who invests in 1000 shares worth of Toyota Company for three years can determine the intrinsic value of his investment by substituting the k and D with their values as shown. Assume a market share price of 3078 yens per share. If 200 yens are given per share, the dividend yield will be equal to:

Dividend yield= (200/3078)*100=6.5%

With k taken as 8% the intrinsic value of Toyota motors shars will be equal to:

IV=200/(1+0.08)+ 200/(1+0.08)2+200/(1+0.08)3

=185.19+171.47+158.77

=515.43 yens.

Comparison between Stock Price and the Intrinsic Value

The intrinsic value of Toyota corporation share is 515.43 yens per share. Compared with the market price per share which is 3078 yens per share, Toyota Corporation’s shares are overvalued. This is because the intrinsic value of shares is less than the market value of those shares.

Recommendations

The decision to buy or sell shares will depend on the nature of investor. For a growth investor, he should buy the shares with the hope that the intrinsic value of these shares will increase. However, for a value investor, the factors to consider include the dividend yield. Regardless of the nature of the investor, it I would advice the investor to consider selling the shares since he stands a chance to benefit from returns higher than the price of the share.

Works Cited

Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New York: John Wiley & Sons. 2012. Print.

Hoover, Scott. Stock Valuation: An Essential Guide to Wall Street’s Most Popular Valuation Models. New York: McGraw-Hill. 2006. Print.

Monks, Robert and Nell, Minow. Corporate Governance. New York: John Wiley & Sons. 2011. Print.

Montier, James. Value Investing: Tools and Techniques for Intelligent Investment. New York: John Wiley and Sons. 2011. Print.