Toyota's Woes
Research for Online Investors

by John Dalt

2/17/10

Toyota’s woes continue to mount. They have now recalled 8.5 million vehicles worldwide. That is almost as many cars as sold in the U.S. last year! What is happening, how long will it go on, and how do we profit from it?

Toyota’s problems started last September when the company recalled 55 thousand Camry’s and Lexus cars for floor mats that interfered with the accelerator.  In October the recall was expanded to 3.8 million vehicles, then 4.2 million in November.  Since the first of the year, the problems have gotten worse.  Most understood a floor mat wadded up under the accelerator, a simple housekeeping problem.  I have warned my daughters about keeping their floor mats straightened in cars.

January started with 2.3 million cars recalled for sticky accelerators, independent from the floor mat problem.  It seemed that as the accelerator mechanism wore, it was susceptible to sticking and could cause cars to speed up, or not slow down, when foot pressure was removed.  I reminded my wife to turn her Lexus key to the ‘off’ position, if the car seemed possessed!

This recall quickly spread, with 1.8 million Toyota’s recalled in Europe, and 1.1 million more for floor mats.  In February, 436 thousand hybrid cars have been recalled for brake problems, 7,300 Camry’s for a brake tube, and 8,000 Tacoma pickups over drive shafts.  Will it end?

The scariest words used to be, “60 Minutes is in the Office, and Mike Wallace would like to speak with you.”  Fast forward 35 years and political one-up-manship is the new crucible of fire.  There are three congressional hearings scheduled, so politicians can grandstand.  TM hit a high of $91.88 on January 16, before the weight of recalls scared investors and traders.  The company’s stock has lost 19.5% in the last four weeks.

They are now considering a recall of the Corolla, for power steering problems.  There were 873 thousand Corollas sold in the U.S. last year with 1.3 million sold world-wide to make it the most popular car in the world.  The company has had fewer than one hundred complaints concerning wondering steering problems.

The scrutiny facing Toyota by the public is now at a hyper level.  Any small problem now becomes a potential dangerous situation in some people’s minds.  The company must treat every reported issue as a possible deadly accident waiting to happen.  The company has announced a brake override system for new models.  This override system would apply the brakes if a driver pressed the brakes and accelerator at the same time.  There is also talk of installing a ‘black box’ on Toyota vehicles to track vehicle data in case of an accident.

Manufactures are required to notify the National Highway Traffic Safety Administration within five days of identifying a defect, and must begin a recall promptly.  State Farm Insurance notified the government of unintended acceleration problems with Toyota cars and trucks in 2007  Congressional hearings will focus on timeliness of recalls and notification of proper authorities. There may be a problem with regulators not doing their job.

This is a reoccurring theme, government employees are not proactive to head off problems.  Do we really want them involved to the degree it would require?

The company announced closures of a car plant in Kentucky, and a truck plant in Texas for short periods to align production with demand.

Toyota halted sales and production on eight models in January for one week, while the accelerator problem was investigated and a fix delivered to dealers and factories.

We are watching the company’s share price, and expect more selling to occur.  The news will be full of bad news for the company in the next couple of months.  The lawyers are circling with class action suits over loss of economic value.  There are also personal injury suits resulting from car wrecks that have resulted in loss of life and or serious injury.  I would suggest waiting for the news to settle down, at least until after first quarter earnings are released.  There may be an opportunity to own TM, but it is not here yet.

This article is based on information from the New York Times, Toyota Takes Steps to Restore Confidence and the BBC World News service, Toyota considers Corolla recall over Steering Problems.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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