Toyota: Why It's a Sell

Ford’s  (F) plans to slash 10% of its staff not only deal a direct blow to President Donald Trump’s pledge to protect U.S. manufacturing jobs but also suggest continued weakness in global auto demand, notes Northern Trust Capital Markets’ head of Asia research Douglas Morton. Morton argues that doesn’t bode well for Toyota (7203.JP).

Even the hopes of continued robustness in Chinese demand (as implied by the recent Toyota results in which their expectations in China were among the only ray of light in our opinion) may start to come under question. Warning signs are building in China’s OEM market, not least in the continued record wide margins between Chinese Rebar and HRC, but also with the concerning trends released by China Passenger Car Association and with China’s latest call for domestically driven New Energy Vehicle investment, the competitive environment is only getting harder for the market that has accounted for the vast majority of global OEM growth in the last 5 years. (We believe Toyota’s comfort on the demand environment for this market may prove to be short lived – Sell Toyota).

And Morton notes weak demand could be only the beginning of Japanese car maker’s woes.

Elsewhere, it may also be worth highlighting once more the fact that Ford and Toyota are likely to remain the two companies most under pressure from the developing auto finance crisis globally. Captive units (the car manufacturers themselves) have been taking significant market share from finance companies and banks as interest rates have declined. Captive finance companies held a new car market share of around 50% in 2Q14 and captive finance units make up around 10% of the revenue of auto manufacturers such as General Motors, Ford, Toyota, and Honda.

Toyota shares are down 12.5% this year and trade at 10 times forward earnings, which is in line with its five-year average level.