Friday, January 21, 2011

Toyota: One Year Later -- It May Be Stronger Than Ever

We have an old saying at DCM that goes back a long way.  "Buy Coke when they are accused of poisoning someone."  This is not some morbid silly aphorism, it is truly how we think about investing.  Bad news that is widely known is probably fully discounted in the current stock price, and thus, financially strong, dominant companies that hit bumps in the road are probably a buy.  This is not the case with smaller, less financially strong firms.  With smaller firms there is always the risk that the banks will take over and ruin the company.

But with big, strong companies, particularly those with a powerful brands, bad news to us is often good news.  It does not mean that we buy every big company with trouble, but we do look at them.

A year or so ago, Toyota (TM) was embroiled in the sticking accelerator issue.  Lawsuits were piling up. Congress had hauled in newly-elected president Toyoda, grandson of the founder, for his obligatory tongue lashing. Local TV news teams were hounding Toyota dealers and customers like the paparazzi for candid shots of the fall of one of the most powerful brands on earth.  It turns out, the death of Toyota may have been announced prematurely.

During those times, Mike Hull, our consumer strategist wrote a piece that was upbeat and suggested that we were nibbling on the stock.  The bottom line of what he said was that Toyota was a powerful brand with customer loyalty that ran much deeper than most people thought.  Additionally TM was one of the strongest companies in the world and had the financial resources to deal successfully with all the issues that it faced. 

The chart at the right is of TM over the last twelve months.  It shows the violent collapse in February, followed by a long bottoming out phase that ended with a sharp upturn in the price of the stock in November of 2010 that reached as high as $86 per share.  The stock has risen nearly 14% since Mike wrote his blog.  That does not make it a hall-of-fame type stock pick, but it does, at least for now, give us further reasons to continue to look closely at great companies who stumble.

By the way, Mike thinks TM has begun a long strategic battle with the other auto companies in the US that may have domestic car companies crying "uncle" again one day.  For all the issues, real and imagined, that came from the sticking accelerator debacle, TM has survived. Mike believes the company is even more dedicated to quality today than they were before the problems, and they are still financially one of the strongest companies in the world. 

If GM, Ford, and the other car companies think they have turned the corner and can now compete effectively with TM across broad product lines, our guess is that time will put everything back in its rightful place.  In our judgment, even though TM may have had some glitches in recent years, they are committed to being in the high-quality personal transportation business.  We believe most other auto companies are in the, well, car business.  Think about it.  There is a difference.