On Thursday, shares of Toyota Motor (7203:JP) (NYSE: NYSE:TM) rose following a reaffirmation of a Buy rating and a JPY3,300.00 price target by BofA Securities. The endorsement comes in the wake of a report by Nikkei on Wednesday that Toyota is aiming to increase its Return on Equity (ROE) target to 20%.
The automotive giant's stock responded positively to the news, closing up 4.6%, outperforming the TOPIX index, which saw a modest gain of 0.2%. According to InvestingPro, Toyota has shown strong momentum with a 4.14% return over the past week, while maintaining an attractive P/E ratio of 9.92.
BofA Securities analyst highlighted that Toyota's intention to enhance its ROE was not unexpected, as the company had previously indicated the goal during its second-quarter fiscal year 2025 earnings briefing. Toyota's past fiscal year, ending in March 2024, recorded an ROE of 15.8%. The company plans to achieve the 20% ROE by improving earnings across its value chain, including auxiliary products. InvestingPro data shows Toyota maintains a "GOOD" overall financial health score, with particularly strong marks in profit and price momentum metrics.
The analyst also drew parallels between Toyota's financial and parts revenues growth and the historical growth experienced by General Electric (NYSE:GE) in its finance business and aircraft engine maintenance, repair, and overhaul (MRO) operations. This comparison underscores the significant role that these segments can play in bolstering Toyota's ROE.
Moreover, the improvement in ROE is viewed as a milestone in Toyota's transformation into a mobility company that derives profits from software and services, beyond traditional vehicle sales. The upcoming disclosure at the Consumer Electronics Show (CES) in January 2025 is anticipated to provide further insights into how the Woven City project will contribute to achieving the company's ROE objectives.
BofA Securities will closely monitor these developments and their potential impact on Toyota's financial targets. InvestingPro analysis suggests Toyota is currently undervalued, while maintaining an impressive 45-year streak of consecutive dividend payments, demonstrating long-term financial stability.
In other recent news, Toyota Motor Corporation (Toyota) and several other automakers face potential earnings risks due to proposed tariff increases on car imports into the United States. According to S&P Global, these tariffs could cost carmakers up to 17% of their combined annual EBITDA. The most vulnerable companies include Volvo (OTC:VLVLY) Cars, Jaguar Land Rover, General Motors (NYSE:GM), and Stellantis (NYSE:STLA), which have significant operations in Europe, Mexico, and Canada. However, mitigation strategies are expected to reduce the actual impact on earnings.
In a separate development, Toyota Motor Credit Corporation (TMCC) has secured $15 billion in new credit facilities. The agreements include a $5 billion 364-day syndicated credit facility, a $5 billion three-year syndicated credit facility, and a $5 billion five-year syndicated credit facility. These facilities involve multiple lenders including BNP Paribas (OTC:BNPQY), Citibank, Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) Bank, and MUFG Bank.
Lastly, Toyota reported a steady operating income of 2.4642 trillion yen for the first half of Fiscal Year 2025, despite facing production halts and additional expenses. The company credited its resilience to collective efforts in strengthening its foundations and improving its business base.
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