Hydrogen Under the Hood at Toyota

NEW YORK (TheStreet) -- The world's leading automaker Toyota (TM) is expecting record annual profits due partly to sales and partly to weakness in the yen. Its fuel-efficient hybrid cars continue to grow their already massive sales. In the meantime, while some of the leading vehicle manufacturers have been trying to capitalize on the increasing demand for electric vehicles like those created by Tesla Motors (TSLA), Toyota on the other hand has been increasing its focus on its hydrogen-powered cars.

On Tuesday, the company reported more than fivefold year-over-year increase in quarterly profits to $5.2 billion. For the full fiscal year, Toyota is targeting net income of $18.8 billion, which would show around 100% increase from net income of $9.5 billion in the previous fiscal year. This would come from sale of 9.98 million vehicles in 2013, more than any other automaker in the world.

Moreover, Toyota plans to retain the crown as the world's best-selling automaker by selling 10.32 million cars in 2014. Some of this increase in sales can be attributed to the popularity of its fuel-efficient hybrid vehicles. They have given a boost to sales in regions like Europe where competitors have struggled.

Despite the positive outlook, Toyota's shares dropped by more than 5% due to the strength of the yen and an expected drop in sales in North America by 30,000 units in the current fiscal year. As a result, Toyota's shares closed at $112.75 on Monday and are trading just 12.9 times their trailing earnings and just 0.85 times their trailing sales.

I believe that is cheap for a blue chip stock with industry-leading sales volume.

Back in 2003, President George W. Bush promised $1.2 billion for research and development for hydrogen-powered cars. Ten years later, due to a lack of infrastructure, the hydrogen cars are still a distant dream. Toyota, on the other hand, is optimistic. Some European nations and Japan have been developing the infrastructure for hydrogen cars. Toyota's executives believe that the U.S. will follow suit.

The infrastructure investment will start with California, Tesla's home ground. Some of the success of the electric vehicle maker is due to the support from the state and its residents. The state is now turning toward hydrogen-powered cars by spending $200 million to build around 100 hydrogen fueling stations by 2024.

Toyota is hoping for considerable improvement in the sale of its hydrogen vehicles in California in the coming years. Meanwhile, Toyota will also increase its lobbying efforts to push other states toward the development of infrastructure for hydrogen cars.

And Toyota, which spends more on research and development than any other company in the world, has been working on hydrogen fuel cell technology for decades. The company will finally start selling its hydrogen powered cars -- which were unveiled at recent car shows held at Los Angeles and Washington -- as early as 2015. The vehicles can reach from zero to 60 miles an hour in 10 seconds and, unlike electric vehicles that take hours to recharge, the hydrogen car can refuel in just around five minutes.

I am enthusiastic about hydrogen-powered cars, which should have a big role to play in the future.

But Tesla founder Elon Musk famously called hydrogen fuel cells "bullsh*t" and referred to fuel cells as "fool cells." Musk strongly believes that the future lies only with electric vehicles.

Toyota remains undeterred and continues to invest heavily in fuel cells. The company believes that its hydrogen cars could be the next Prius -- a game-changer for Toyota. However, that doesn't mean that the company is going to ignore the development of its popular hybrid models. On the contrary. Toyota is pursuing higher sales and profits in Europe and Russia in the current year by growing sales of hybrid cars.

Unlike hydrogen-powered cars, which emit only water vapor, hybrid cars use petroleum. However, hybrid cars have significantly lower carbon emissions and are considerably more fuel efficient than a conventional gasoline or diesel-powered vehicle.

In Europe, Toyota is the 10th biggest player in terms of car sales. The business, however, has been improving its sales volume in Europe. Moreover, unlike American rivals General Motors (GM) and Ford (F), Toyota has been profitable in Europe. In its latest results announced earlier today, Feb. 4, Toyota reported a 17% increase in sales volume in Europe from last year as its operating income in the continent rose an impressive 91%, from the same quarter a year ago, to $174.7 million.

Here, Toyota's growth is being led by the company's hybrid vehicles. In the U.K, Toyota's production rose 65% in 2013 due to the strong demand for hybrid cars. The company's plants in the U.K. are now running at full capacity and producing more hybrids than ever before. As a result, hybrid cars accounted for around 20% of Toyota's European sales in 2013, as opposed to 13% in 2012.

While Toyota is betting big on hydrogen and hybrid vehicles, its competitors are increasing their focus on electric vehicles. Toyota's Japanese rival Nissan (NSANY) is gearing up to significantly increase the output of its electric Leaf from its plant in Sunderland, U.K., to tap into the growing demand from Europe.


At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Sarfaraz A. Khan is a capital market analyst and finance writer. Khan earned an MBA from the University of Aberdeen, located in the heart of the UK's oil and gas industry. Not surprisingly, his specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on Seeking Alpha, Motley Fool and TheStreet.

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