Toyota Motor (TM) plans to increase its return on equity to compete globally, reports said Wednesday. Earlier this week, Honda Motor (HMC) and Nissan (NSANY) confirmed they are in talks about a possible merger at time of auto industry upheaval. Toyota stock soared on Thursday, with Honda stock and Nissan stock jumping above key technical levels to extend recent rallies.
Both Toyota and Honda posted quarterly profit declines in November, amid challenges in critical global markets, including the U.S. Japan and China.
Reported Toyota ROE Target
On Wednesday, an unnamed Toyota executive told Japan’s Nikkei newspaper that the car giant aims to increase its return on equity (ROE) to 20%, up from market forecasts of 11% for the fiscal year ending in March. The executive suggested Toyota is trying to achieve this target to maintain global competitiveness, with the article suggesting the company is aiming to achieve this level by around 2030.
A Toyota spokesperson said the company “doesn’t have an explicit target or deadline” for ROE. The profit metric is calculated by dividing net income by shareholder’s equity.
Shares of Toyota Motor soared more than 8%, above 196, in Thursday’s stock market action. Toyota stock tried to regain the 200-day moving average after regaining the 50-day line in recent sessions.
The stock, which has dropped 23% from a March high, shows a very weak IBD Composite Rating of 26, out of a best-possible 99.
Honda-Nissan Merger
Meanwhile, the possible merger of Honda and Nissan, Japan’s second and third biggest carmakers, along with smaller Mitsubishi, would create the world’s third largest automaker by annual sales, trailing only Japanese peer Toyota and German giant Volkswagen (VWAGY). Honda also said it plans to buy back up to 1.1 trillion yen ($7 billion) of its shares by Dec. 23 next year.
Embattled car giants Honda and Nissan hope to stave off falling sales and intensifying competition. Their joint statement on merger talks Monday alluded to “dramatic changes in the environment surrounding both companies and the automotive industry,” a likely reference to these powerful forces gaining strength:
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Electrification: Legacy auto giants are in the middle of a massive shift from gas and diesel cars to electric and hybrid vehicles in a bid to lower polluting emissions. Newer vehicles are also increasingly software defined. All this adds up to steep development costs. By merging, Honda and Nissan could jointly develop such vehicles and use common platforms to share and optimize costs. Cost saving is especially important for the companies right now. Both Honda and Nissan’s sales are in a sharp two-year slump. Honda posted a steep quarterly profit drop in November, mainly due to a challenging Chinese market.
Competition: Chinese EV makers continue to rise in the domestic and overseas markets. China dominates global EV supply chains and subsidizes its EV industry, with its automakers churning out affordable electric cars. Affordable doesn’t necessarily mean cheap. Chinese EV giant BYD (BYDDF) and its startup peers, including Nio (NIO) and XPeng (XPEV), make technology-driven electric cars that are proving worthy rivals to Tesla (TSLA) cars. Korean EV makers like Hyundai and Kia are also on the rise. By comparison, Japan’s auto giants are trying to catch up in fully battery electric vehicles, though they are leaders in hybrid cars. A merger could improve efficiencies in their EV investments.
Autonomy: Analysts at Morgan Stanley identified a third force forcing Honda and Nissan to consider a merger: the rise of semi autonomous and, eventually, fully autonomous vehicles. Tesla and some of its Chinese rivals are the clear leaders in vehicle autonomy, with Tesla optimistically promising to roll out autonomous vehicles that don’t require human supervision next year. Maturing autonomous technologies have placed Nissan and Honda under new pressure to fund AI and software development, the Morgan Stanley analysts said in a Dec. 18 note. They noted Tesla’s doubling to $1.5 trillion market capitalization in the span of six weeks, adding: “If the age of autonomy has truly arrived, then things will move very fast from here.”
Honda Stock, Nissan Stock And EV Stocks
Shares of Honda Motor popped nearly 4% in Thursday’s stock market action. Honda stock regained the 50-day moving average intraday after jumping nearly 13% on Monday. The 50-day line remains below the 200-day line. stock has dropped 25% from a March high, and carries a poor Composite Rating of 39.
Nissan stock rocketed more than 15% above the 200-day line on Thursday and giving it a 47% gain for December. It bears a Composite Rating of 26 out of 99.
Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.
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