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The Toyota Enigma


Peter Lynch, Fidelity Investments' famous fund manager, used to urge people back in the '80s to invest in the companies that dominated their everyday lives. And a current TV ad for an online brokerage shows a mall-bound daughter unwittingly giving her perceptive dad a fashion-stock tip. That "buy what you know" adage hasn't changed.

So why doesn't a lightbulb go off every time Dad starts up his Camry? Toyota Motor Corp. (TM) is on pace to be the world's No. 1 auto maker by 2008. It produces nearly one of every six cars sold in the U.S., including nine models in the South and Midwest, where it employs 32,000 Americans. Even New York livery cab fleets, once largely made up of leathery Lincolns, now feature Toyota's Prius, the hit hybrid taking coastal cities by storm.

Yet Toyota, which since 1999 has traded as an American depositary receipt on the New York Stock Exchange, is rarely mentioned as an investment in the U.S. Its average daily volume of 370,000 shares is just a fraction of General Motors Corp.'s (GM) 13 million and Ford Motor Co.'s (F) 26 million. Although Toyota boasts more than six times the combined market value of GM and Ford, only two U.S. equity analysts cover the stock (table). Toyota's shares, which have soared 70% since their U.S. debut, should be selling themselves. But even after their seven-year rise, they trade at a discount to GM, Ford, and ADR-listed DaimlerChrysler (DCX) on a price-earnings basis.

While just one little letter separates Toyota's U.S. ticker symbol, TM, from GM, there's a world of difference. For all its brand strength, Toyota largely remains terra incognita to American investors, while GM can still attract buyers even as it flirts with bankruptcy. "Toyota stock doesn't have the 'mind share' of GM or Ford," says John M. Novak, an auto analyst at Chicago's Morningstar Inc. (MORN). "There's a perception that you can't invest in it [because] it's a Japanese company -- that you would require a special account."

That perception is wrong, of course. U.S. investors needn't bother selling dollars for yen in the currency market before buying Toyota shares on Japan's Nikkei exchange. Toyota's ADR is dollar-denominated, with each one representing two shares of the Japanese common stock. It's no harder to buy than U.S. shares. Just point and click. (A spokesman says Toyota isn't unknown to U.S. investors, noting that volume has risen steadily over the years.)

Yet, Toyota is an afterthought even among sophisticated institutional investors. Charles K. Bobrinskoy, vice-chairman of Ariel Capital Management, a Chicago value investing shop, essentially stumbled upon the stock when he was screening for components for a fund launch last year. "We were stunned when Toyota came up," he says. "We thought it was a typo." Ariel started buying at 74 in March, 2005; the stock now fetches around 100. His theory on why it isn't more widely held by institutions: "It's [Toyota's] cars that are reported on in the U.S., not the earnings -- as opposed to GM, which is all about earnings per share and the balance sheet." Novak agrees: "GM and Ford are constantly in the news for issues beyond stock performance." Perversely, he says, the negative attention keeps them on the investing radars of retail and institutional investors alike.

Toyota's trading volume will always be constrained by foreign companies' exclusion from the major U.S. stock indexes. One high-net-worth wealth manager confesses that he has customized the Standard & Poor's 500-stock index by replacing GM and Ford with Toyota's ADR. While that strategy would have performed far better than an S&P 500 index fund over the past seven years, it's complicated and, with multiple trading commissions, expensive. Flattering to Toyota, no doubt, but precisely the kind of move that would never fly on its assembly lines.

By Roben Farzad


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