Investment Case Study: Honda vs Toyota
These companies have en the leading competitors in the automotive industry few a good few decades. Both Honda and Toyota boast a long history of providing quality, reliable cars to consumers. Today the Honda Civic and the Toyota Campy are probably two of the most well known and recognizable car models. Along with these signature cars, both companies provide wide variety of vehicles ranging from hybrid cars to full-size pickup trucks. Innovations In the hybrid Industry have helped Increase Toast’s I nee layout Purls NAS pretty much Decode ten standard Tort all toner nodded success. Ears. With its very recognizable style and fuel efficiency, the Pries has definitely had a hand in helping Toyota stay at the top of the automotive industry.
Honda relying mainly on the reliability and quality of its smaller list of cars has remained a solid competitor with its standards like the Civic and their cross-over vehicles like their CRY- Reliability and quality have been the main selling points for both Honda and Toyota vehicles in the past. Their innovative new designs and cars have helped to give them a significant lead over the other companies in the industry.
However in the recent years, the gap between these companies and the rest of the automotive industry has drastically decreased. During the collapse of the U. S. Automotive industry, Toyota and Honda both had the chance to completely dominate the competition.
Instead of becoming more innovative and taking over the competition both companies became complacent. This lead to companies like Handgun, Aka, and Volkswagen becoming more aggressive. With other automotive companies close behind, Toyota and Honda are soon likely to be taken over by the competition.
Toyota ND Hand’s complacency has also led to a decline in the safety aspect of their cars. A string of recalls for both companies has proven that Toyota and Honda both have not been putting their full focus into safety.
In October of 2012 Toyota recalled 7. 43 million cars for a problem with a potentially defective power window switch. This recall is the largest since Ford‘s recall of 7. 9 million vehicles in 1996. A more recent recall for Toyota involves faulty airbags and windshield wiper defects.
Honda has also had its fair share of recalls.
Honda has very recently issued a recall for 183,000 cars or problems involving unintended braking issues. Earlier at the start of 2013, Honda recalled roughly three-quarters of a million cars. This recall was due to defects in airbags that could cause them to fail to properly deploy in a crash. The companies that had once topped the charts in safety and reliability have become plagued with so many safety problems that they topped the charts in largest recalls.
Toyota had the most vehicles involved in recalls in 2010, while Honda had the most vehicles involved in recalls in 2011. In 2012 Toyota again topped the list of most recalls in the U.
S. Racket. Although Toyota and Honda have dealt with major safety issues, they both remain in the top rankings for automotive sales. In 2012 Toyota drove past General Motors to claim the title of world’s largest automaker.
In 2008 Toyota also managed to take the title away from General Motors. Although not as successful as Toyota, Honda has regularly been in the upper bracket for automotive sales and production. Profit Margin and Pro Formal A company’s profit margin is computed by dividing its net income by its total operating revenue; thus profit is expressed as a percentage of operating revenue.
This ratio represents a company’s ability to produce a product at a low cost, or sell it at a high price. This calculation is a direct representation of a company’s earnings; however it does not give any insight about the company or its future. It does not give any information about the company’s risk, and it does not take future earnings into account.
Also, when analyzing a company’s profit margin, the type of company needs to be taken into consideration. Service companies tend to have higher profit margins than trade companies. The profit margins of Honda and Toyota are 0. 03 and 0. 02 respectively.
NOVO can be found by using the equation NOVO = Stock Price – PEPS/r, where PEPS is Earning per Share and r is the discount rate of the stock.
Looking at Hand’s latest stock value, we Tina Its stock price to De S be 2. 56. To find the discount rate for Honda we have to perform an analysis of the stocks expected returns, which we found to be 10. 91%. So, plugging in our values into the formula, we get NOVO = 39.
09 – 2. 56/. 1091 which gives us NOVO = 15. 62. Thus, we find that the growth opportunity for Honda is $15. 62 per share.
Looking at Toast’s latest stock value, we find its stock price at $103. 53 with an PEPS of 6. 17. Again performing an analysis of the expected returns, we find the discount rate for Toyota to be 9. 73%. Using the equation, we get NOVO = 103.
3 – 6. 17/. 0973 which gives NOVO = 40. 12. Thus we find that the growth opportunity for Toyota is $40. 12 per share.
The growth opportunity of a company is important in determining its value because it means that the company is investing in new projects that could lead to innovation. Without any growth opportunity, the company is not researching new technologies which can lead to it falling behind its competitors. Thus, the more growth opportunity a company has, the more the company is trying to innovate. Since NOVO is a direct reflection on the company’s growth opportunity, the higher NOVO is, the more the company is investing in its future.
Stock Prices and Returns Stock investments are risky, but, by performing the necessary calculations, one is able to determine average returns, volatility, and performance of the stock over a period of time.
After calculations are made or acquired, we can then assess whether or not to invest. For most situations, it is important to diversify our portfolio (invest in a profile of multiple stocks). In addition to potentially yielding the same return, diversifying will produce a lower risk compared to the purchasing of Just one stock. In our case, we will be evaluating the stocks for our two chosen companies: Honda Motor Company and Toyota Motor Company, Ltd. As discussed previously, both stocks pertain to the automobile industry, which, according to Sacks Equity Research, “is highly concentrated.
The top-10 global automakers account for roughly 80% of the worldwide production and nearly 90% of total vehicles sold in the U.
S. ” (Sacks Equity Research 1). Among the firms that dominate this industry are Honda and Toyota. Honda Over the past five years, Honda stock has sold for as high as $43 per share (February 2011) and as low as $18 per share (December 2008). Though this seems to e a large difference, one must keep in mind that the stock market crashed during 2008; all companies were selling shares of the company at much lower prices. Taking a look at the history of Honda stocks from 1987 until the present date, one can easily see exponential growth in the price of stock, with an overall increase of 681.
While deviations from this previous trend is probable, they do indicate that stock prices Tort Honda wall continue to role In price as market rates Increase Ana automobile companies continue to innovate. [pica] Figure 1: Honda Stock Prices (Cot. ’12 – Today) In order to calculate significant data regarding Honda stock, we extracted daily stock prices as well as annual dividends from December 1 1, 2012 to March 18, 2013. Per the New York Stock Exchange, the past six months’ stock price is shown in Figure 1 on the previous page.
From the NYSE data, we calculated both the arithmetic and geometric returns. Shown below, Table 1 summarizes the pertinent data we calculated. From these statistics, we can see that the overall return for each month was about 6. 71%.
Average Price Per Share Arithmetic Average Telecommuting Average Daily I Average Dividend I Return per month I Standard Deviation I I HONDA Returns $37. 37 1.
29 I Returns 10. 27% I Yield 10. 90% 12. 6% I(in price) 16. 71% Table 1: Honda Motor Company Stocks Below, Graph 1 proves to us that the percentages for daily return have been fluctuating less over the course of this past month.
This would indicate that the market is neither booming nor failing, and could be due to their lack of new lines of automobiles. New models are typically introduced during the middle of the year, so it is not a surprise these past few months have not seen much fluctuation. Grape Toyota 1: Honda
Motor company Dally Returns Moving on to Toyota Motor Company, one notices that the trend is quite different than that of Honda. Over the course of five years, Toyota stocks sold at a high of about $105 (May 2008) and a low of about $58 (December 2008). Once again, this large drop in price can be attributed to the stock market crash. Looking at the history of Toyota from 1993 until present time, one may notice huge variance, particularly in 2000 (rise), 2003 (drop), 2007 (rise), and 2008 (drop).
The drop in 2003 can most likely be attributed to the fiscal loss of thousands of tire replacements required by the Ford Explorer-Firestone lawsuit decision. The overall price increase in Toyota stocks over the course of 20 years was 234. 82%.
Figure 2: Toyota Stock Prices (Cot. ’12 – Today) Having extracted the data in Figure 2 to Microsoft Excel, we then used the stock prices and annual dividends to calculate the statistics show in Table 2 (below).
From December 1 1, 2012 to March 18, 2013, the return per month came out to be 6. 6%. Average Price Per Share Arithmetic Average Daily I Geometric Average Daily I Average Dividend Yield I Return per month Standard Deviation (nil I $97. 63 | 5. 30 Table 2. 10.
29% I price) 10. 88% 11. 40% 16. 60% Toyota Motor Company Stocks As seen In Grape 2, ten percentages Tort ally return seemed to nucleate quite a D (except for the past month).
This could be due to the fact that the automobile industry is in a steady period (no new makes and models lately).
Graph 2: Toyota Motor Company Daily Returns Volatility When investing in stocks, one must take risk into consideration. Unlike idiosyncratic risk, systematic risk cannot be diversified away. To determine the amount of systematic risk that a company has, beta, which is a measure of volatility, must be calculated. The value of beta determines how the stock price will move with the market. A beta less than one indicates that the stock is less volatile than the market while a beta greater than one indicates that a stock is more volatile than the market.
Using the necessary equations, we determined that the beta for Honda throughout this period was 1. 03 while the beta for Toyota was 1. 09. These values are both relatively close to 1, which indicates that the prices generally move with the market. Moreover, these stocks are not as influenced by the day-to-day market as those with large beta values are (tech companies for example). As discussed revisions, Toast’s larger beta indicates that it is a bit more risky than Honda.
Using the CAMP model, with the 30-year Treasury bill rate being 3. 06%, we discover that these stocks are priced correctly. The expected return lines up well according to the beta we calculated.
With this information regarding stocks, we can begin to assess whether investing in these stocks is worthwhile or not. Conclusion We would invest in both of these companies’ stock.
Due to the fact that they are proven companies, we do not consider this pair a high-risk/high-reward scenario. Both companies have had positive monthly returns over the past four months, but heir standard deviations (how much the prices fluctuate) were very different. If we would like to see immediate (lower) gains with less risk, we would favor Honda. If, however, time isn’t an important factor and we don’t need to see results to sell soon, Toast’s ratio would be higher. This is due to the companies’ future.
While these two companies may currently be competitors in the automobile Ministry, tenure Tortures are projected to De very Deterrent. We expect to see dividends in the near future from Honda, but Toast’s forecast will be filled with fewer dividends due to their investments in other companies and research. Both companies have very clearly stated what they will be doing moving forward, so it would be unwise of us to guess anything different. Thus, Hand’s focus will be manufacturing what they know best (small Subs), while Toast’s focus will be on innovation and looking to implement state-of-the-art technology in new cars. In 10 years, Honda will be a company using average technology.
They will not have branched out or risked much.
Toyota, on the other hand, will be in the middle of an arms race to discover and implement the next trendy technology. In 50 years, Honda will still be a company using average technology. They will not have branched out or risked much, unless they decide to expand their non- automobile sectors. Toyota, having had huge gains with their latest discoveries, will be atop the automobile manufacturers as well as being a large contributor to alternative energy! We believe that both Honda and Toyota will, respecting the market, continue to boast positive returns and have up-ward trends. If the past is any indication of the future, Toast’s model will continue to fluctuate and respond to the market more variably than Honda.