Toyota Motor Corp. (NYSE ADR: TM), one of the largest manufacturing companies in the world, has offered strong periods of growth from which investors have profited.
However, today it is a "Sell" – and is likely headed toward a long-term redevelopment of its core company structure (**).
Toyota was founded in 1933 and is headquartered in Toyota City, Japan. Toyota has more than 300,000 employees and a global network of production plants. The company has a market capitalization of $126 billion with an enterprise value of $238 billion, once net cash and debt are accounted for.
In 2008, it was the largest automobile manufacturer in the world, a title previously held for over 70 years by General Motors Co. (NYSE: GM).
But since 2008, Toyota has been plagued by a series of events that have caused it to repeatedly halt production. These endless work stoppage issues are starting to affect the long-term viability of the internal structural management of the company's supply chain.
Toyota's supply chain is known for embracing "just-in-time" (JIT) warehousing infrastructure in its assembly lines. The JIT process helped the company save billions of dollars in capital by not having any inventory sitting around in factories or warehouses. This allowed Toyota to leverage its balance sheet by deploying its capital in production, and not in warehouse inventory.
JIT manufacturing shaped Toyota's assembly plants design, its inventory structure, and its reliance on specific subcontractors.
This worked until March 11, 2011, when Japan's great quake hit.
Profit-Crushing Domino Effect
The global supply chain for auto manufacturing relied on critical parts built in factories in Japan. While the majority of these factories were not affected by the quake or tsunami directly, they have been affected by rolling black outs, or a lack of parts from vendors who provide them with sub-assemblies that are sent to the factory.
"This is the biggest impact ever in the history of the automobile industry," said Koji Endo, managing director at Advanced Research Japan in Tokyo.
Toyota isn't the only the poster child for the supply chain issue. Other competitors in the automobile industry are experiencing supply issues as well, like Nissan Motor Co. Ltd. (PINK ADR: NSANY)and its primary engine plant. In the case of Ford Motor Co. (NYSE: F), it is the color of the paint sourced from Japan that's the issue.
"It's hard enough to sell a $60,000 Navigator in this economy," said Fortunes O'Neal, general manager at Park Cities Ford in Dallas. "We don't want to have to tell customers, 'You've got to pick another color.'"
Still, Toyota will feel the burden to a higher degree than its competitors will.
This is because Toyota built its company around the "just-in-time" process in all aspects, leaving the company massively exposed to a major supply disruption. It not only embraced the strategy of only having the necessary parts available at the assembly line itself, it backsourced its warehouse reserve parts in the same way.
Toyota is left needing everything to arrive at the right time.
The implications of this will become more noticeable in the weeks and months ahead. Toyota has to build new parts factories from scratch, while changing the basic designs of some of its cars mid-year.
In hindsight, JIT manufacturing will become known for its weakness in basic risk management. The lack of spare capacity across the production supply chain will have long-term ramifications on rebuilding the auto industry.
In the United States, where Toyota should be shifting its manufacturing focus, it is canceling all overtime and is cutting back to single shifts.
"Everyone is putting on the brakes a little bit and taking a look to see where they are affected," said Paul Newton, an analyst with IHS Automotive.
The company's stock price shows its pain.
The stock price hit a low of $67.56 on September 2, 2010 and a high of $93.68 on Feb. 16, 2011. The company stock is currently trading in the $80 per share range. If you look at the stock's recent activity in the accompanying chart, it appears to be forming a head and shoulders pattern.
It is time to sell Toyota and move that capital to the sidelines. The great period of growth for the company is over. The reality is that Toyota has grown too quickly, without the necessary spare capacity in its supply chain to weather a major event like Japan's March 11 great quake.
Toyota is a liquid stock, with enough trading to allow you to leave on your terms. I would hit the sell button and look for better value stories, or even new organic growth. Toyota has a long road ahead of it, as it changes its supply chain enough to adapt to the effects of this crisis.
(**) Special Note of Disclosure: Jack Barnes has no interest in Toyota. (NYSE: TM).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Endeavour Silver Corp. (NYSE: EXK)]
News and Related Story Links:
- Business from AP :
As Japan shutdowns drag on, auto crisis worsens
- The Tire Business:
Toyota braces for slowdown in North American output
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features
- Money Morning:
Supply Chain Disruptions from Japan Disasters Hit Auto, Electronics Industries
- Money Morning:
Disasters Driving Japan Auto Parts Makers to China
Confessions of a Macro Contrarian.