Another Frustrating Stock I Own - Toyota Motors

I began investing in TM early this year with it trading at about $130 per ADR (the ADR equals 2 TM shares). After getting as high as $138 it last week went below $105. On the way down I have bought LEAP calls, sold LEAP puts and sold short term puts. I have made money on a number of the short term puts but overall am so far underwater I need a periscope. Friday's close was just north of $110.

I believe the Toyota ADR is worth $165 a share. This is a company that will only increase its dominance of the auto industry over the next decade. Why is the stock struggling? I believe there are several reasons. First, The economic slowdown in the U.S., 40% of Toyota's revenue, is problematic. The housing and credit troubles raise concerns about auto sales being negatively impacted. There are fears that the credit problems will start to crop up in auto loans.

Second, the Yen continues to hold even with the dollar even as the Dollar continues to depreciate against other foreign currencies such as the Euro. A strengthening Yen will have a negative impact on Toyota's top and bottom line numbers.

Although the Bank of Japan continues to keep interest rates at 0.5% there is concern that the Yen carry trade may suddenly unravel. If that were to happen a lot of money managers would have to buy large quantities of Yen, driving the value of the Yen up against the Dollar. Also, if the Bank of Japan decided to begin raising interest rates the Yen in all probability would strengthen.

But lets look at the positives for Toyota. Toyota continues to gain market share almost every month against the America automakers. Last month was an anomaly in that General Motors' U.S. sales increased slightly while Toyota's sales declined by 4%. However Ford's sales declined 21% for the month (year over year) after a more than 30% decline the month before.

Toyota is immensely profitable vis a vis its American and other global counterparts. Last year Toyota Motors made twice as much profit as Ford, GM and Honda Motors combined.

Bob Nardelli will likely run Chrysler into the ground the way he did Home Depot. John Snow, former Treasury Secretary and the head of Cerberus Capital, hired Bob Nardelli. As Treasury Secretary John Snow did not impress has being the sharpest knife in the drawer.

Toyota is making strong inroads into China, as is General Motors. Finally there is valuation. Toyota sells for a P/E of 11.38. On every valuation metric Toyota stands alone in the automotive industry. I suppose that Honda may have a premium valuation due to the fact that it is smaller and may be able do better regarding the law of large numbers. But I think Toyota is going to rule the automotive world. They are making steady process in competing for the full size truck, the last segment of dominance of U.S. car makers.

Toyota has more than 10% of the value of its shares in cash. In fact, Toyota can afford to pay cash for General Motors given GM's market cap and Toyota would have some change left over.

Hopefully Toyota will move up as we continue to gain more clarity on the credit mess and whether the U.S. economy will re-accelerate into 2008.

Direct Competitor Comparison statistics are from Yahoo Finance.

Disclosure: at the time of this posting the author was long TM.