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Detroit's in the Rearview

Shares of Toyota and Honda have shown a lot of get-go this summer.
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Bankruptcy roiled the airline industry this week, as spiking fuel costs dealt






a losing hand. Will Detroit be the next to fold?

On top of untenable health care costs, exhausted promotions and dwindling market share, the gasoline price shock that followed Hurricane Katrina has made the product missteps of

General Motors








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seem all the more threatening. No more are gas-guzzling trucks and sport utility vehicles flying off the lots. With consumers getting stingy, Detroit's Big Three might not face imminent insolvency, but they're acting like roadkill all the same.

Meanwhile, the cheaper, fuel-efficient alternatives offered by Japanese manufacturers have given shareholders of






a sweet ride as of late.

As crude oil futures trading on the Nymex crossed the $60 mark in late June, shares of these two stocks caught fire. Since the beginning of July, Toyota shares have gained more than 20% while Honda has added almost 11%.

On one level, Honda and Toyota have benefited from the aggressive summer promotional campaigns adopted by the Big Three after GM posted a 46% jump in unit sales in June on its "employee discount" program. Sales at GM, Ford and Daimler-Chrysler all benefited from the ensuing price war, but their Japanese counterparts held their ground as well. Since Toyota and Honda didn't have to sacrifice profit margins to compete, investors smelled opportunity and jumped onboard.

"They were not impacted nearly as much as the domestics would have hoped," said Argus Research analyst Kevin Tynan, referring to Toyota and Honda. "Plus, a lot of people anticipated that the domestics were doing longer-term damage to themselves, so they figured the end result would be more market share for the Japanese."

Apparently, they figured right. In August, when the demand inspired by summer promotions tapered off, GM reported that sales fell 16%. Ford and Daimler-Chrysler fared better, with monthly gains of 6.3% and 5% respectively, but their results still marked a decline from July. Furthermore, their Japanese counterparts continued to shine, with Toyota posting a 9.5% gain, its best-ever August tally.

Analysts are forecasting dark days for the auto industry this fall, based on their belief that summer promotions pulled September and October sales forward. Also, soaring gasoline and home heating prices in the wake of Hurricane Katrina are likely to crimp discretionary spending and hold consumers at bay.

Tynan said anyone buying a car in the coming months will be that much more fuel conscious.

"There's a lot of talk out there about how high gas prices have to go and for how long before there's really a fundamental shift toward more fuel-efficient vehicles," Tynan said. "We're now seeing that shift take place. Also, that 'bigger is better' mentality that led to so many daily drivers cruising around in Hummers is becoming passe. If you're a car buyer in the U.S. and fuel economy is a concern, then you are beginning your search at an import dealership."

These sentiments are especially evident in Frankfurt, Germany, where a major auto show kicked off Thursday. Kazuo Okamoto, Toyota's executive vice president, told reporters on Monday that "in the future, the cars you see from Toyota will be 100% hybrid," according to

The New York Times


Toyota pioneered the hybrid car with its Prius, a compact car with a gasoline-electric engine. Now, it's putting the engines in other models, including sport utility vehicles. Conservation-minded consumers buy the vehicles at a $3,000 to $5,000 premium, but Toyota's new president, Katsuaki Watanabe, also said recently that the company plans to cut that extra cost in half in the coming years.

Toyota hopes to sell 240,000 to 250,000 hybrid vehicles globally this year, nearly double the 130,000 it sold in 2004, and the company has a long-term goal of selling a million a year by 2010.

Ford and Honda also sell hybrids, but Toyota has a significant lead in the growing market. On Wednesday in Frankfurt, Honda Chief Executive Takeo Fukui reportedly said the company has decided not to build an eight-cylinder engine because of high fuel prices. The company plans to focus instead on expanding diesel and gasoline-electric engine output.

Despite recent stock gains at Toyota and Honda, trading volume levels in both are low since many institutions avoid trading in American deposit receipts. ADRs allow U.S. investors to trade in international securities within the U.S. without requiring them to deal directly in volatile foreign capital markets and currencies. The shares are subject to different regulatory standards that are sometimes viewed as looser than those enforced in the U.S. Also, they increase currency risk.

Still, Ivan Feinseth, director of research with Matrix USA, rates Toyota and Honda a buy, even after their summer run-up. He advises investors to steer clear of domestic automakers. While the entire industry is headed for a slowdown, he points to the Japanese companies' return on capital and increasing market share as evidence they are a better investment in the long run.

According to Feinseth, GM operates at an economic loss, since its cost of capital is 6.7% while its return on capital is only 2.1%. Ford offers a return on capital of 4.6% vs. its cost of 6.8%. Meanwhile, Honda has achieved a 6.2% return compared to its cost of 7.7%. That gives the manufacturer a slight loss, but Feinseth said the company is improving.

Toyota, which has its sights set on overtaking GM as the world's largest auto manufacturer, boasts an 8% return, above its 7.7% cost of capital.

"GM and Ford are viewed as value stocks in a restructuring mode, which is a tough place to be in such a competitive atmosphere," Feinseth said. "On a relative value basis, Toyota and Honda are offering good performance at a slight discount."