Young and Invested

The recent recall from Toyota may help approximately nine million vehicles, but not the company’s stock.           

As of today, 5 fatalities have been reported, and lawmakers around the world continue to monitor Toyota’s reactive actions to the allegedly sticking gas pedals. As responsive as Toyota has been in handling the situation, it won’t be soon forgotten; definitely not until the improved components are shown to work over a considerable time period, which could take months or even years. For now, the bad publicity is certain to cause consumers to pump the brakes on Toyota purchases, and its stock will see a similar effect. After recovering from March’s (2009) lows of approximately $57 to $91 in mid-January 2010, the stock has already seen a 19% decline to $73.

Toyota’s stock will be stabbed with two spikes. First, the immediate monetary impact of the recall is massive, which has been estimated at about $350 per vehicle and $1 billion on an aggregate recall scale. Still, this estimate does not include potential litigation expenditures, halted production in more than half its vehicles, and most importantly, the impact of lost reputation and sales for the long-term. Toyota, which was known particularly for a “strong brand” of high quality vehicles, has suffered lasting losses in customer and investor confidence, and Toyota’s sales and stock prices are likely to decline for months to come.  

Nevertheless, the recall has not resulted in slim pickings for consumers beginning car-shopping in an improving economy. As in all business, what’s bad for one corporate giant is often good for others. Where Toyota has suffered due to the recall, other automakers are quickly stepping in. January 2010 vehicle sales (in the United States) for Toyota have declined by 15.8% from January 2009 (and are at the lowest level since 1999), whereas for the same time-frame Ford sales are up 24.4%, Hyundai sales are up 24%, and Volkswagen sales have ballooned an incredible 41%. If a similar trend persists throughout 2010, the entire landscape of the auto industry in North America and around could change.

For now, investors should be pumping the brakes on Toyota stock, and certainly consider a strong upcoming year for some of the other large auto producers mentioned above. Toyota sales and stock will continue to skid through 2010.

Disclosure: no positions

Image credit: Neubie under a Creative Commons license

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