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Toyota (TM) Cuts July Output Target, Collaborates With Redwood

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Japan-based auto biggie Toyota (TM - Free Report) slashed its production plan yet again amid exacerbated supply chain snarls due to the Russia-Ukraine war and COVID-induced curbs in China. It trimmed its July worldwide output target by 50,000 vehicles. Volumes for July are expected to be around 800,000 units (with 25,000 units in Japan and 550,000 units overseas). The automaker also expanded production halts at its Motomachi and Takaoka plants. TM expects the average global output for the July-September period to be around 850,000 units per month. Nonetheless, it hasn’t lowered its fiscal 2022 global production target of 9.7 million vehicles but has notified that there might be a "possibility" that the forecast might be lowered. 

As we know, the geopolitical conflict between Russia and Ukraine has prolonged auto industry woes. Post a rocky 2020 amid coronavirus woes, market experts predicted a somewhat smoother run for the auto industry in 2021. But when things seemed to be looking up for the auto market in early 2021, with sales recovering from coronavirus lows, the mounting shortage of semiconductors again left the industry in disarray. Just when the industry watchdogs and auto giants were predicting the chip deficit to gradually start easing out from mid-2022, the Russia-Ukraine war triggered the second round of global microchip shortage. Aggravating supply chain snafus are once again prompting automakers to temporarily halt operations in factories, which would limit production and put a lid on sales volumes.

Considering the production cuts and a limited supply of microchips, inventory is likely to remain low for quite some time. The executive vice president of sales for Toyota North America, Bob Carter believes that it would take around six months for inventory rates to normalize after the supply chain recovers. Additionally, soaring prices of raw materials such as aluminum and nickel will also play a spoilsport. High production expenses would then be passed on to consumers, driving the prices for both ICE and electric vehicles, as everything from batteries to catalytic converters would get more expensive. It remains to be seen if affordability would become an issue, considering rising interest rates and recessionary fears around the globe.

In another development, Toyota has teamed up with Redwood Materials for electric vehicle battery recycling. In sync with their united efforts toward sustainable carbon-neutral operations, the two companies will explore end-of-life battery solutions for Toyota’s battery ecosystem. Initially, TM and Redwood intend to focus on the collection, testing and recycling of Toyota’s hybrid EV batteries. They would then expand their collaboration into other areas like battery health screening and data management, remanufacturing and battery material supply throughout North America.

Toyota had pledged to invest $3.4 billion (380 billion yen) for automotive battery development and production in the United States through 2030. Last December, Toyota announced plans to invest $1.29 billion in the battery plant, to be named Toyota Battery Manufacturing, North Carolina (TBMNC). The facility is expected to create 1,750 new jobs and use 100% renewable energy to make the batteries. The production is anticipated to commence in 2025. TBMNC will initially have four production lines, each capable of manufacturing battery packs for around 200,000 cars annually. Toyota eventually aims to add two more lines, with the goal to rev up the total production capacity to battery packs sufficient for 1.2 million vehicles per year.

Notably, Toyota has been the king of hybrid vehicles since the introduction of its popular Prius compact vehicle. However, the auto giant has been relatively slower in the adoption of EVs into its lineup.  Amid cut-throat competition — with more and more legacy automakers committing to electrified lineups — Toyota has bolstered its electrification efforts lately. Notably, Toyota expects to sell 8 million EVs worldwide by 2030 and spend $70 billion on their development.It targets to sell 8 million partially or fully electrified vehicles by 2030. About 2 million will be battery-powered cars and fuel-cell vehicles, while the other 6 million will be gasoline-electric hybrids or plug-in hybrids.

Zacks Rank & Key Picks

Toyota currently carries a Zacks Rank #3 (Hold). If you wish to invest in the auto space, consider placing bets on stocks like Lithia Motors (LAD - Free Report) , Penske Automotive (PAG - Free Report) and Group 1 Automotive (GPI - Free Report) While Lithia and Penske sport a Zacks Rank #1 (Strong Buy), Group 1 carries a Zacks Rank #2 (Buy).

Lithia is valued at around $7.8 billion. The Zacks Consensus Estimate for LAD’s 2022 earnings has been revised 10.6% upward over the past 60 days. The company has a projected earnings growth rate of 19.5% for 2022.  Lithia's aggressive buyouts and the Driveway platform are likely to boost its prospects. Robust cash flows and investor-friendly moves of the firm are further driving shareholders’ confidence.

Penske is valued at around $8 billion. The Zacks Consensus Estimate for PAG’s 2022 earnings has been revised 3.4% upward over the past 30 days. The company has a projected earnings growth rate of 13.7% for 2022. Penske’s spree of buyouts, low leverage and commitment to maximize shareholder value augur well.

Group 1 is valued at approximately $2.8 billion. The Zacks Consensus Estimate for GPI’s 2022 earnings has been revised 11.8% upward over the past 60 days. The company has a projected earnings growth rate of 23% for 2022. In 2021, Group 1 completed transactions representing $2.5 billion of acquired revenues. The AcceleRide platform, its online retailing initiative, active at most of the firm’s U.S. dealerships, is likely to aid Group 1’s long-term prospects. 

You can see the complete list of today’s Zacks #1 Rank stocks here