Toyota Stock Surges 9% on Report of Doubling Profitability Target

Toyota Motor Corp's (TM) U.S.-listed shares surged 9% on Thursday, following a report from Nikkei that the Japanese automaker is aiming to double its return on equity (ROE) to 20%. The news comes just days after an announcement from Honda and Nissan about their plans to merge.

Analysts were reportedly anticipating an 11% return on equity this fiscal year. However, the Nikkei report cited an unnamed executive with the automaker who said Toyota wants to achieve a 20% ROE, roughly double what analysts were expecting. A spokesperson for the company later clarified that Toyota doesn't have an explicit target or deadline to reach that figure.

Toyota shares were up over 8% at $196.22 in intraday trading Thursday, and have gained close to 7% for 2024 so far. The news comes just days after the Japanese auto industry was roiled by an announcement from Honda and Nissan that the two companies plan to merge. Moody's analysts applauded the move, arguing that it would be "credit positive" if done properly. However, former Nissan CEO Carlos Ghosn warned in an interview that Nissan could face cost-cutting "carnage" in such an arrangement.

Toyota's planned increase in ROE is a significant development for the company and its shareholders. To achieve this target, Toyota is expected to focus on boosting earnings from the value chain and improving capital efficiency. Morgan Stanley MUFG Securities analyst Shinji Kakiuchi noted that Toyota would need to "boost earnings from the value chain, in order to further propel profit margins upward." Additionally, the company is expected to take funds from selling its equity holdings to bolster shareholder returns further.

Toyota's shift towards a mobility-focused business model, leveraging software and services, is also expected to enhance its profitability. The company has highlighted the importance of expanding value chain earnings, such as post-sale software services, to achieve its target return on equity (ROE) by around 2030. Morgan Stanley analysts have mentioned the importance of "rebuilding the business model" by moving away from a sole reliance on new vehicle sales to include revenue streams like software updates and auxiliary services. This shift is part of Toyota's broader strategy to enhance profitability and maintain global competitiveness.

Bank of America analysts have emphasized Toyota's potential to benefit from growth in its financial and parts divisions, comparing the strategy to General Electric's success in its finance and maintenance businesses. They also highlighted Toyota's shift towards a mobility-focused business model, leveraging software and services to enhance profitability. The analysts noted that the company's June 2025 annual general meeting may also bring further governance enhancements to bolster shareholder confidence.

Toyota's planned 20% ROE is a significant increase from its historical averages and industry benchmarks. According to the provided data, Toyota's forward P/E ratio is 9.49, which is much lower than the average forward P/E ratio of its peers at 37.96. This indicates that Toyota's stock is relatively undervalued compared to its competitors. Additionally, Toyota has reported average annual revenue growth of 6.86% over the past five years, which is a solid growth rate but still lower than some of its competitors. Therefore, Toyota's planned 20% ROE is a significant increase from its historical averages and industry benchmarks, and it suggests that the company is aiming to improve its profitability and shareholder returns.

In conclusion, Toyota's planned increase in return on equity (ROE) to 20% has the potential to significantly impact its valuation and investment appeal compared to its peers. This is due to the expected improvements in profitability, dividend yield, valuation metrics, analyst recommendations, and competitive position. However, it's important to note that achieving this target ROE will depend on various factors, including the successful execution of Toyota's growth strategies and the overall economic conditions.