Description

Looked at as a closed-end investment company, Toyota Industries common stock represents a way of buying Toyota Motor Corp. (TMC) common at about a 35% discount from net asset value based on the market price for TMC common. TMC has been steadily gaining market share on a worldwide basis. As such, it is possible that TMC might become the “Wal-Mart” of the automotive industry, the low cost producer with great customer acceptance and credibility.

Toyota Industries is a diversified Japanese industrial company. It was the parent company to TMC, and today is involved in four businesses: automobile-related, materials handling equipment, textile machinery and other (primarily electronics-related). Toyota Industries is the single largest shareholder of TMC, holding about a 5% equity interest. The company also holds a substantial portfolio of common stock of Toyota group companies. (TMC holds an approximately 24% common stock interest in Toyota Industries). Toyota Industries common stock currently trades at $17.54 per share (Y2115), yet its investment portfolio holding alone, mostly comprising TMC common, has a market value of around $24.16 per share. TMC is very well capitalized and has been increasing its global market penetration. The biggest investment risk seems to be that Toyota Industries is a Japanese company, not a Delaware corporation, i.e., who’s to say that in a takeover situation that minority shareholders will receive fair value, and if they don’t, little recourse action seems available. Nonetheless, at these discounted prices, buying Toyota Industries common seems pretty compelling.

Toyota Industries’ FY01 (ended 3/01) results:
Segment FY01Revenues % Operating Income %
Auto-related Y457.6 billion 59.6% Y28.5 billion 60.1%
Matls Handling 236.5 30.8 14.5 30.6
Textile Machinery 33.2 4.3 0.035 0.07
Other 40.0 5.3 4.4 9.2

The automobile segment consists of assembly of several TMC’s vehicles, including the popular Vitz (called the Echo is the US and the Yaris in Europe) and starting this year the RAV4, and manufacture of car air-conditioning compressors and engines. Toyota Industries holds the leading share of the global car air-conditioner compressor market. It is aggressively marketing its compressors to car manufacturers worldwide, not just to TMC. For example, Toyota Industries has been increasing its share in this market at General Motors, Volkswagen and Fiat. Demand for car air-conditioning has been increasing, particularly in Europe which until recently had not really embraced air-conditioning in cars. The company manufactures both gasoline and diesel engines and is focusing its development efforts on enhancing environmental friendliness features.

In June 2000, Toyota Industries acquired BT Industries AB, a leading materials handling equipment manufacturer, and in April 2001 took over the materials handling sales and marketing function from TMC. The combined Toyota/BT share of the forklift truck market is around 20%, making it the global industry leader. An increasing need for more efficient distribution and logistical support is expected to drive forklift market growth

Toyota Industries also has a joint venture with Sony Corp. to manufacture liquid crystal display (LCD) panels and a joint venture with Ibiden to manufacture electronic substrates such as for ball grid array type packaging and flexible printed circuits.

Toyota Industries is well capitalized. In today’s market environment, where access to capital markets has all but dried up, Toyota Industries’ strong financial position is a competitive advantage. The company can use its balance sheet to continue to expand its businesses, reduce costs and acquire complementary assets at discounted prices.

Valuation
Investing in Toyota Industries common stock is a way to buy into several good operating businesses and TMC common stock at a discount. TMC is the largest producer of automobiles in Japan and is increasing its market share globally. TMC’s market share in Japan (excluding mini vehicles) has increased from 39.2% in FY98 (ended 3/98) to 43.1% in FY00. In North American, it has increased its market share from 6.8% in CY94 to 10.1% year-to-date (September) 2001 and is closing the sales gap with Chrysler. TMC is focusing on gaining share in Europe by building a stronger manufacturing base there (it recently started manufacturing in France) and by designing for that market’s needs (the Yaris was selected as European Car of the Year in November 1999). It also holds about a 20% market share in ASEAN markets (Thailand, Indonesia, Philippines, Malaysia, and Singapore). Longer-term benefits are likely to arise from its focus on environmental friendliness; TMC was the first company to mass-produce a hybrid passenger car (Prius).

Conservatively valuing the operations of Toyota Industries at a 6x EBIT multiple and adding the value of the investment portfolio, marked to market, results in a net asset value for Toyota Industries common of $26.66, a 34% discount compared to current prices.

6.0x 7.0x Per Toyota Industries share
Operating Income
(FYE 3/01) $2,354,018 $2,746,355
Less:non-convertible
funded debt 1,564,609 1,564,609
_________ _________
789,410 1,181,746 $2.51 $3.75
196,545 shares
Toyota Motor Common
@ $27.95/sh 5,493,433 5,493,433 17.44 17.44
Remaining portfolio
of marketable securities
at mkt 10/2/01 2,116,331 2,116,331 6.72 6.72
_________ _________ ____ _____
NAV appraising Toyota
Industries as a closed-end
investment co. 8,399,174 8,791,510 $26.66 $27.91

Discount from NAV 34.2% 37.1%

Catalyst

Greater than 30% discount from net asset value. Discount could narrow when the automotive industry recovers, if Toyota Industries and TMC continue to at least maintain their market positions. Value could be unlocked if TMC decided to either monetize its holding in Toyota Industries common or increase its holding, though the valuation doesn’t depend on either of these events occurring.