Should you buy Toyota Motors shares after dropping 25% YTD?

Toyota Motor Corporation (NYSE: TM) shares have weakened 25% since the beginning of the 2022 year, and the current price stands at $139.

Toyota continues to face supply-chain issues, and the company recently reported that U.S. sales dipped 9.8% Y/Y to 169,626 vehicles in August.

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Toyota continues to face supply-chain issues

Toyota is a global market leader in sales of hybrid electric vehicles, but the company has been hit harder by supply chain issues than most auto manufacturers, and because of this, new vehicle orders stretch out to multi-year wait times.

The company’s management reported that Toyota hadn’t reached the end of supply-chain issues yet, and the shortages will continue to cause problems to electric-vehicle manufacturing and cause delays. Akio Toyoda, President of Toyota Motor Corporation, said:

The situation remains difficult to predict due to semiconductor shortages. However, we will continue to carefully monitor the parts supply chain and minimize sudden decreases in production as much as possible while making every effort to deliver as many vehicles [as possible] to our customers at the earliest date.

Higher prices of raw materials prices also influenced the company’s business, and Toyota Motor Corp.’s profits fell 18%Y/Y  for the quarter ended June.

Further, worries of an impending global slowdown continue to keep investors in a negative mood, and it is important to keep in mind that recessions are extremely hard for auto manufacturers.

According to Deloitte Insights, there is a 45% correlation between the depth of a recession and reduced manufacturing output in the automotive industry.

This means automakers will need a balance sheet capable of withstanding a significant downturn in spending on new vehicles, and weaknesses in Toyota’s financial health can become more painful and prominent.

Toyota is overpriced against many big auto manufacturing firms by most valuation metrics, and probably it is not the best moment to buy shares of Toyota Motor Corporation.

According price-to-earnings ratio, Toyota shares are trading at 8.47, which is nearly two times higher than the price-to-earnings ratio of Ford Motor Company (NYSE: F), which is trading at a P/E of 4.63.

It is also important to mention that General Motors (NYSE: GM), which proves to be highly aggressive in its EV expansion, trades at a P/E of 7.34 and at less than four times TTM EBITDA.

Toyota Motor trades at more than six times TTM EBITDA, it has had multiple cuts to production output expectations this year due to supply chain problems, and there are better investment opportunities in the auto industry at the moment.

Technical analysis

Toyota Motor shares have weakened 25% since the beginning of the 2022 year, and the risk of further decline is still not over.

The chart above shows that Toyota’s price has been in a strong bearish trend since January 13, 2022. The price is still moving below the 10-day moving average, indicating that the bottom is still not reached.

If the price falls below $130 support, it would be a firm “sell” signal, and the next target could be a price level at $120.

Summary

Toyota Motor shares remain under pressure, and the company continues to face supply-chain issues. Toyota is overpriced against many big auto manufacturing firms by most valuation metrics, and probably it is not the best moment for buying shares of this company.