Why Toyota Motors Stock Slipped on Monday


Toyota’s latest “scandal” seems a proverbial tempest in a teacup.

Toyota Motors (TM -2.64%) stock slid 2.8% through 1 p.m. ET Monday after The Wall Street Journal reported that it, as well as Mazda, Honda, and a few other Japanese automakers, have decided to suspend shipments of some car models, pending investigation of “certification issues” related to the cars’ safety.

What’s up with Japanese cars this month?

The issues in question don’t imply any performance issues necessarily, nor any immediate risk to driving the cars, as Toyota explained. However, the company admitted that the data it used in evaluating the cars’ performance as related to “occupant protection” (i.e., crash tests) and also pedestrian protection (how well the cars avoid accidents) may have been inadequate, and “didn’t fully follow the government‘s testing standards,” resulting in inflated safety ratings.

“These acts shake the very foundations of the certification system,” said company chairman Akio Toyoda, and “must never be committed.”

How bad is this news for Toyota?

That being said, this is no reason for Toyota investors to panic. While a disruption in car shipments may result as Toyota investigates exactly what went wrong with its certification process, at worst it seems the company may need to retest some car models to develop new ratings consistent with Japanese government testing standards — which, in all likelihood, they’ll still pass, albeit perhaps with lower ratings.

Toyota’s brand may also take a hit from the scandal. But I suspect any hit will be small, especially considering that the company is getting out ahead of this story — and that the deviation from testing standards doesn’t affect Toyota alone, but seems to have affected most of the Japanese automakers it competes with as well.

At a valuation of less than 9x earnings, with a 2.2% dividend yield and a projected long-term growth rate approaching 16%, Toyota stock still looks like a solid buy to me.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.



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