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June 26, 2014

Toyota Motor Corp. (TM-NYSE)

Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 06/26/2014

Current Price (06/25/14) $117.47 Target Price $123.00

SUMMARY

SUMMARY DATA We are downgrading Toyota to Neutral based on its weak fiscal 2015 guidance and a string of 52-WeekRisk HighLevel * $134.33 product recalls. However, the automaker’s leading Type of Stock Large-Value 52-Week Low $103.39 position in terms of global vehicle sales, rising One-Year Return (%) 2.00 Industry Auto -Foreigncash flows, product development, capacity Beta Zacks Industry Rank * 0.72 220 out of 267 Average Daily Volume (sh) 360,022 increase, expansion in emerging markets and the ZACKSnew CONSENSUS share repurchase ESTIMATES program are various Shares Outstanding (mil) 1,584 positives. Moreover, Toyota plays a pivotal role in Market Capitalization ($mil) $186,072 Revenuethe Estimates global market for environment-friendly (In millionsvehicles. of $) The automaker posted consolidated net Short Interest Ratio (days) 1.91 Q1 Q2 Q3 Q4 Year Institutional Ownership (%) 2 income of ¥1.82 trillion ($17.7 billion) for fourth- (Jun) (Sep) (Dec) (Mar) (Mar) Insider Ownership (%) N/A quarter fiscal 2014 (ending Mar 31, 2014), surging 2013from NA¥962.1 billionNA ($10.5NA billion) inNA the year-ago256,800 A Annual Cash Dividend $2.93 2014quarter.NA ConsolidatedNA revenuesNA escalatedNA 256,90012.6% A Dividend Yield (%) 2.49 2015year overNA year toNA ¥6.57 trillionNA ($63.8NA billion).255,102 E

2016 NA NA NA NA 264,391 E 5-Yr. Historical Growth Rates Sales (%) 8.6 Earnings Per Share Estimates Earnings Per Share (%) 81.2 (EPS is operating earnings before non-recurring items, but including employee Dividend (%) 17.5 stock options expenses) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) P/E using TTM EPS 20.4 2013 NA NA NA NA $3.66 A P/E using 2015 Estimate 9.9 2014 NA NA NA NA $5.75 A P/E using 2016 Estimate 9.4 2015 NA NA NA NA $11.91 E 2016 NA NA NA NA $12.51 E Zacks Rank *: Short Term 1 – 3 months outlook 4 - Sell Projected EPS Growth - Next 5 Years % N/A * Definition / Disclosure on last page © 2014 Zacks Investment Research, All Rights reserved. www.Zacks.com 111 North Canal Street, Chicago IL 60606 OVERVIEW Indonesia, to catch up with other leading automakers in the market. By 2017, it aims to introduce 15 new or redesigned models Japan-based Toyota Motor Corporation (TM) is in China. The company aims to boost its the leading automaker in the world in terms of sales in emerging markets to 50% of global sales and production. Its product portfolio sales from 45% in fiscal 2011 and 18.6% in consists of a full range of models from fiscal 2000. This is part of its target to passenger cars and minivans to trucks as well achieve annual sales of more than 10 as related parts and accessories. The million vehicles by fiscal 2015 in over 100 company’s operations are classified into three countries. Toyota also plans to double its segments: Automotive (92.6% of net revenues sales in China to 2 million units. The in fiscal 2014), Financial Services (5.5%) and company also intends to manufacture new All Other (4.5%)*. models starting at about ¥1 million ($12,600), mainly in Brazil, China and India Toyota’s Automotive business caters to its by procuring 100% of the car components domestic market as well as markets in North locally at low costs. As a result, the America, Europe and other countries. Other company intends to strengthen research markets include East and Southeast Asian and development activities in those countries. Globally, Toyota sold approximately markets. Moreover, Toyota plans to double 9.1 million vehicles in fiscal 2014. its production capacity in Russia to 100,000 units by 2016. It also plans to augment the Roughly 60% of all Toyota vehicles sold in production capacity in Argentina to 140,000 North America are built locally, with parts units by 2015 end. In Apr 2014, the sourced from over 500 North American automaker announced the development of suppliers. Toyota has 51 manufacturing 14 new gasoline engines that will boost the companies in 27 countries and regions, fuel efficiency of its cars by 10%. These producing vehicle brands including Toyota, engines will be introduced globally in Lexus, Hino and Daihatsu as well as various Toyota cars by 2015. automobile components.  Toyota recaptured the sales crown from Toyota’s Financial Services business primarily General Motors by selling 9.75 million finances dealers and customers for the vehicles globally in 2012, which exceeded purchase or lease of Toyota vehicles. The GM’s sales of 9.29 million vehicles. Toyota business also offers retail leasing through the maintained its position in 2013 as well, with purchase of lease contracts originated by global sales of 9.98 million vehicles Toyota dealers. surpassing General Motors’ sales of 9.71 million units. Even in the first quarter of Toyota’s All Other business segment fiscal 2014, the Japanese automaker comprises the design and manufacture of surpassed all other automakers to sell 2.58 prefabricated housing and information million vehicles globally. Toyota’s victory technology related businesses, including an e- can be attributed to its impressive product commerce platform called GAZOO.com. lineup and marketing initiatives. The * Total does not add up to 100% due to eliminations. automaker had first earned the No.1 position in 2008 and maintained it for the next 2 years but lost significant market share in 2011 due to product recalls in the REASONS TO BUY U.S. and problems with parts suppliers because of the earthquake and tsunami in  Toyota is banking on emerging markets, Japan. As a result, General Motors took the including Asia, for its sales growth. By fiscal lead in 2011, followed by Volkswagen. 2015 the automaker plans to introduce eight However, Toyota surpassed General Motors compact car models in the emerging and Volkswagen to become the largest- markets including Brazil, China, India and selling automaker again in 2012 and

Equity Research TM | Page 2 retained the leading position in 2013 due to to announce a repurchase plan for 30 strong demand in both the Japanese and million shares in Mar 2014. This repurchase international markets. Toyota projects global program is Toyota’s first in the last 5 years sales volume of 10.32 million units in fiscal and the biggest since 2003. 2014, up 4% over fiscal 2013. If the company attains this forecast, it will become the first automaker to surpass the 10-million mark. REASONS TO SELL

 Toyota occupies the No.1 spot in hybrid  The past string of recalls has negatively offerings. Since 1997, the automaker has affected Toyota’s reputation, resulting in sold more than 5.13 million hybrid vehicles lower vehicle resale value. The automaker till Mar 31, 2013. It expects to launch 21 recalled almost 5.3 million vehicles each in gas-electric hybrid models by fiscal 2015, 2012 and 2013, which is the largest number most of them having a similarity with its of vehicles recalled by any automaker in widely acclaimed Prius. The automaker these years. It has already surpassed this dominates the hybrid market with its Toyota figure in 2014 by recalling 6.36 million and Lexus offerings as well as the Prius vehicles globally on a single day in Apr hybrids. In May 2014, the automaker 2014. In 2012, the U.S. Department of announced the development of a computer Transportation slapped the maximum chip that will boost the fuel efficiency of its allowable fine of $17.35 million on Toyota gas-electric hybrid cars by 10%. These due to delayed response regarding a defect apart, by fiscal 2015, Toyota plans to launch in its vehicles as well as late recall of those a hydrogen fuel cell vehicle in collaboration vehicles. This fine was in addition to the with Honda. The automaker is also investing $48.4 million fine imposed by the U.S. in FirstElement Fuel Inc., a startup company government on the automaker in 2010 due that will open at least 19 hydrogen-fuel to late recall of millions of defective stations in California. vehicles. Toyota also made one of the largest settlements in the history of  Toyota plans to shift its North American automotive industry of $1.6 billion in a class- headquarters to North Dallas, TX by fiscal action lawsuit related to complaints of 2017. The company currently has three unintended acceleration in its vehicles. The different North American headquarters for company also incurred $1.1 billion during manufacturing, sales and marketing, which the recall of such vehicles. Moreover, in Mar will all shift to the new headquarters along 2014, Toyota agreed to a $1.2 billion with its corporate operations and the North settlement for criminal charges related to American finance arm. While the move will problems in the accelerator pedals and floor increase costs (in terms of headquarter mats of its cars, which led to sudden construction and employee relocation), it will acceleration and even crashes. The increase collaboration and efficiency. National Highway Traffic Safety Moreover, Toyota will receive significant Administration (NHTSA) has also started an incentives from the Texas government. investigation into reports of brake failure in the 2007 and 2008 Toyota Camry hybrid  Toyota’s operating net cash flow improved sedan. 68.8% to ¥2.45 trillion ($26.03 billion) in fiscal 2013 from ¥1.45 trillion in the prior-  The looming power shortages in Japan, fiscal year, primarily on the back of higher caused by the meltdowns at Fukushima profits and significant rise in deferred Daiichi nuclear power plant after the income taxes. It climbed further to ¥3.65 earthquake, are hampering Toyota’s trillion ($36.5 billion) in fiscal 2014 from operations. As a result, the company has ¥2.45 trillion ($29.5 billion) recorded in the decided to trim its production capacity in year-ago period. The improving balance Japan by 10% to 3.1 million units by 2014 in sheet and profitability also allowed Toyota order to cut its domestic output. Moreover,

Equity Research TM | Page 3 sales in Japan are expected to decline by 155,000 units in fiscal 2015 due to the Toyota recorded earnings of ¥574.92 ($5.75) impact of higher consumption tax. per share in fiscal 2014, comfortably beating ¥303.78 ($3.66) per share in fiscal 2013. Net  Political conflict between Beijing and Tokyo income increased to ¥1.82 trillion ($18.2 billion) over disputed islands in the East China Sea from ¥962.2 billion ($11.6 billion) in fiscal 2013. is adversely affecting Japanese automakers’ sales in China, one of the Consolidated revenues surged 16.4% to ¥25.69 largest markets of Toyota. Moreover, trillion ($256.9 billion) from ¥22.06 trillion weakness in the Indian market and the ($256.8 billion) in fiscal 2013. expiration of the first-time car buyer tax rebate in Thailand is also hampering sales Segment Results in Asia. Sluggish sales in Europe due to the economic crisis in the continent have been The Automotive segment’s revenues rose 12% hampering the company as well. to ¥6.05 trillion ($58.7 billion) in the quarter while its operating income declined 21.8% to  Toyota’s net earnings are expected to fall ¥315.1 billion ($3.06 billion). 2.4% to ¥1.78 trillion ($17.8 billion) or ¥ $561.56 ($5.62) per share in fiscal 2015. The Financial Services segment’s revenues Consolidated vehicle sales are also scaled up 14.2% to ¥368.5 billion ($3.58 billion), expected to fall to 9.10 million units from while the operating income improved 30.5% to 9.12 million in fiscal 2014. Consolidated ¥94.2 billion ($914.6 million). revenues are estimated to be ¥25.7 trillion ($257 billion), in line with fiscal 2014. All Other businesses revenues improved 18.3% to ¥364.8 billion ($3.5 billion) and operating income increased 47.8% to ¥23.2 billion ($225.2 million). RECENT NEWS Financial Position

Toyota Q4 Earnings Beat, Shares Down – Toyota had cash and cash equivalents of ¥2.04 May 8, 2014 trillion ($20.4 billion) as of Mar 31, 2014, compared with ¥1.72 trillion ($20.7 billion) as on Toyota posted consolidated net income of Mar 31, 2013. Total debt amounted to ¥16.33 ¥1.82 trillion ($17.7 billion) for fourth-quarter trillion ($163.3 billion) as of Mar 31, 2014, fiscal 2014 (ending Mar 31, 2014), surging from compared with ¥14.1 trillion ($169.88 billion) as ¥962.1 billion ($10.5 billion) in the year-ago on Mar 31, 2013. quarter. In fiscal 2014, operating net cash flow improved Consolidated revenues in the quarter escalated to ¥3.65 trillion ($36.5 billion) from ¥2.45 trillion 12.6% year over year to ¥6.57 trillion ($63.8 ($29.5 billion) recorded in the year-ago period. billion). Unit sales augmented 4.1% to 2.33 million units. Unit sales rose 18.5% to 724 Fiscal 2015 Guidance thousand units in Japan and 9.2% to 214 thousand units in Europe. However, sales Toyota announced its projections for fiscal declined 6% to 567 thousand units in North 2015. Consolidated revenues are estimated to America and 1.9% to 408 thousand units in be ¥25.7 trillion ($257 billion), in line with fiscal Asia. 2014. Operating income is expected to rise 0.3% year over year to ¥2.3 trillion ($23 billion). Operating income declined to ¥436.1 billion Net earnings are expected to fall 2.4% to ¥1.78 ($4.2 billion) from ¥502.3 billion ($5.5 billion) a trillion ($17.8 billion) or ¥$561.56 ($5.62) per year ago. share. Fiscal 2014 Results

Equity Research TM | Page 4 Consolidated vehicle sales for fiscal 2015 are expected to be about 9.10 million units, down from 9.12 million in fiscal 2014.

Equity Research TM | Page 5 VALUATION

Currently, shares of Toyota Motor are trading at 9.9x our fiscal 2015 EPS estimate of $11.91. Over the last five years, shares of Toyota Motor have traded in a range of 9.4x to 62.7x trailing 12-month earnings. The stock is trading at a discount to the peer group, based on forward earnings estimates. The current P/E, which is close to the lower end of the historical range, is at a 20.2% discount to the peer group for 2015. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our target price of $123.00, which is 10.3x our 2015 EPS estimate, reflects this view.

Key Indicators

P/E P/E 5-Yr 5-Yr P/E P/E Est. 5-Yr P/CF P/E High Low F1 F2 EPS Gr% (TTM) (TTM) (TTM) (TTM) Toyota Motor Corp. (TM) 9.9 9.4 N/A 6.1 20.4 62.7 9.4

Industry Average 12.4 9.5 12.5 6.1 13.6 68.4 6.7 S&P 500 16.7 15.6 10.7 14.6 18.2 27.7 12.0

Volkswagen AG (VLKAY) 8.9 8.0 N/A 2.4 9.9 38.4 2.5 Daimler AG (DDAIF) 11.0 10.9 13.9 6.6 12.6 27.7 5.8 Fiat S.p.A. (FIATY) 23.5 6.2 N/A N/A N/A 166.2 5.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/B Last P/B P/B ROE D/E Div Yield EV/EBITDA Qtr. 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM) Toyota Motor Corp. (TM) 1.2 1.4 0.7 12.6 0.6 2.4 6.1

Industry Average 1.5 1.5 1.5 11.3 1.2 1.3 6.0 S&P 500 4.7 9.8 3.2 23.3 N/A 1.9 N/A

Equity Research TM | Page 6 Earnings Surprise and Estimate Revision History DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of TM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1028 companies covered: Outperform - 14.5%, Neutral - 79.2%, Underperform – 5.4%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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