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Module 13: Full-Information Forecasting and Valuation

Module 13: Full-Information Forecasting and Valuation. Mairin Talerico. Snapshot of Toyota. Limited liability, joint-stock company incorporated under Commercial Code of Japan; started in 1930s Primarily in automotive industry, but also financial services and others

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Module 13: Full-Information Forecasting and Valuation

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  1. Module 13: Full-Information Forecasting and Valuation Mairin Talerico

  2. Snapshot of Toyota Limited liability, joint-stock company incorporated under Commercial Code of Japan; started in 1930s Primarily in automotive industry, but also financial services and others Sold 9.98 million vehicles in fiscal 2013 Sell in 170 different countries and regions Primary markets: Japan, North America, Europe and Asia

  3. Auto Manufacturing – At a Glance TM F GM

  4. SWOT Analysis Strengths Opportunities Research and Development initiatives A leader in green cars development Selling in Japan and North American markets Geographically expansive manufacturing locations Toyota Motor Credit Credit Corporation [49% US Sales had financing] Develop environmentally friendly vehicles and technologies Safe vehicles Ability to increase market share in growing economies and markets Sustainable growth and optimal supply of products globally Finance more cars and increase profits Growth through acquisitions

  5. SWOT Analysis Cont. Weaknesses Threats Product recalls Always staying abreast of new technology and financial offerings Abiding by all gov’t regulations and legal proceedings Declining sales in Europe 51% US Sales don’t have financing Weak presence in emerging markets Brand reputation Worldwide auto market is highly competitive, volatile + Financial services industry Decrease profit Risk losing a major market for sales Highly competitive financial services industry

  6. Role of Sales Growth, EPM, and EATO • The same forecasting process is applied in the same three-step sequence: • Forecast revenues via forecasts of sales growth rates • Forecast EPAT via forecasts of EPM and components of EPM • Forecast NEA via forecasts of EATO and components of EATO

  7. Forecasting Revenue • Two main sources of income: automotive and financing • From 2012 to 2013 • Automotive sales increased 20.2% • Financing revenues increased 6.4% • Net revenues for “other operations” increased 1.7% • Steady state eventually reaches total growth for TM of ~4%

  8. Cost Reduction Efforts – Too Unpredictable • TM is trying for ~$4.78 billion in cost reduction efforts. • Its efforts are solid; however, product quality/recalls, change in vehicle sales, and unfavorable impacts of foreign currency fluctuation are impeding the progress. • COGS increased 2012-2013 by 14% • Cost of Financing operations increased by 6.4% • SGA increased by 14.3% • COGS is consistently 82-85% of sales • Conclusion: • Set COGS to be 83% of sales • Set Cost of Financing = 2.75% of sales [downward trend over years; the average of cost of financing over 2010-2013 is 3.28%]

  9. SGA Explained R&D: Trend is 3.66% of Sales. TM believes “long-term success depends on its ability to secure a leadership position with respect to vehicle R&D” (TM 2013 annual report)  TM plans to increasingly invest; use 3.75% of sales Advertising: Increasing over time, Mgt plans to increase due to economic upswing. Trend 1.44 to 1.50, set at 1.60% of sales

  10. Computation of EPAT

  11. Computation of NEA

  12. Computation of NEA Cont.

  13. Computation of NFL

  14. Computation of NFL Cont. Decreasing NFL raises a concern.

  15. EPM EPM is an issue. Industry EPM ~8%. EPM will cause the valuation models to tremendously undervalue Toyota. EATO

  16. Used Bloomberg’s WACC

  17. DiscountedCash Flow Model

  18. Residual Income Model

  19. Abnormal Enterprise Income Growth Model

  20. Enterprise Value Calculation

  21. Sensitivity Analysis SELL TM is undervalued according to my calculations. However, this is due to the fact that EPM is SO low. If EPM were to be 8% like industry norm, then EV jumps to be about $390,586m. In that case…BUY

  22. Sample Valuation with higher EPM - DCF Yields a higher EV; Closer to market

  23. Enterprise Calculation with higher EPM

  24. In Conclusion • Confidence is weakened by the decreasing NFL • An auto manufacturer is expected to be heavily leveraged; assumptions/forecasts for FA [financial assets] are weak • EPM lower than industry average • When increased, it reflects a enterprise value that is more on par with the market. • EPM changes recommendation • If using higher industry EPM, BUY because the stock is undervalued!

  25. Questions?

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