The latest global recall by Toyota Motors (NYSE:TM) due to engine defects is yet another in the series of self-inflicted troubles the world's largest automaker has created for itself. What will the effects of these troubles be?
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Engine Troubles
Possible defective valve springs which may cause its Lexus and Crown models to stall while in motion has caused Toyota Motors to issue its latest recall. 270,000 cars worldwide will be affected, including 138,000 vehicles in the United States. Toyota has already recalled 8.5 million vehicles for such problems as gas pedals which stick and brake software that may not work properly. 17,000 Lexus hybrids were also recalled last week. Toyota has been sued due to accidents regarding possibly defective vehicles, but has been working to assure customers it's improving its safety and quality issues.
Business Troubles
Toyota had its first losing year in fiscal 2009, which saw it register a loss of $4.356 billion, or a loss of $2.77 per diluted share. Revenue fell from $232 billion in fiscal 2008 to $204 billion. The depth of the worldwide recession which slammed auto sales, along with corresponding write downs made for these ugly numbers. Fiscal 2010 was better, as Toyota along with other automakers such as Ford Motor (NYSE:F) began to emerge from the maelstrom. Toyota's revenues were flat, but its income was back on track as it earned $2.268 billion, or $1.45 per diluted share. Worldwide rival Ford roared back with strong revenue and profit increases. Ford has continued to gain ground in the global auto wars, as its sales gains indicate.
How Much Damage?
When the sticking accelerator issue first surfaced with Toyota, there was speculation how much damage the company's slow response would do. At the half-year mark, Toyota is third in US sales, with 739,112 units sold, versus Chevy's 791,006 and Ford's 858,454, according to Autodata. It's important to note that auto sales softened in June, including a sequential 13% dip for Ford compared to May, while Toyota registered a 14% drop. Other Japanese automakers also slid; Honda Motors (NYSE:HMC) dropped 9% from May, while Nissan Motors (OTC:NSANY) fell 23%. So Toyota has been damaged by both the poor economy and its recall issues, yet the unknown is how long the recall hangovers will persist.
On The Horizon
There is much in flux in the auto world. Fledgling Tesla Motors (Nasdaq:TSLA), the new electric car maker which hopes to ride a sea change to more environmentally friendly cars, has thus far sold only roughly 1,000 vehicles, but hopes to become a major player one day. More ominous is heavyweight competitor, South Korean powerhouse Hyundai Motor, which has blistering sales growth. Continued quality issues along with the perception of poor responsiveness by Toyota, especially in a sluggish car-buying economy, could bring longer term problems for Toyota.
Toyota Prospects And Stock
Toyota's stock has suffered a beat down, to $70 and some change, near its 52-week low year-low. We've written in the past that we like the stock as a value, and that the company still had long-term business strength going forward. That was with the warning that it needed not to relapse into more safety issues. Unfortunately, it has. This has dented some of its strength. So while the stock still represents value, it's not as good an investment right now. We need to see improved visibility on its fundamentals, namely the ongoing safety failures. (Find out more about what to consider before buying these stocks in Analyzing Auto Stocks)
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