Toyota’s stock faced a decline following two significant events that have shaken investor confidence. The first blow came with the announcement of a recall on approximately 1 million vehicles due to a potential issue with the air-bag system. According to a news release, there are concerns that the Occupant Classification System sensors in the front passenger seat may have been manufactured improperly, leading to a short circuit. As a result, the air bag might not properly classify the occupant’s weight, potentially failing to deploy as intended in certain crashes, therefore increasing the risk of injury.
The second problem revolves around Toyota’s subsidiary, Daihatsu, which specializes in compact cars. A third-party investigation uncovered multiple irregularities in vehicle testing, specifically mentioning side-impact crash tests and other components and features. Consequently, Toyota has taken the decision to halt shipments of all Daihatsu vehicles.
In response to these issues, Daihatsu expressed their sincere apologies in a news release, acknowledging the inconvenience and concern caused to their customers and stakeholders. Meanwhile, Japan’s Transport Ministry conducted a raid as part of their investigation into the irregularities, but Toyota has yet to comment on this matter.
The impact of these developments was evident in the stock market, with Toyota shares experiencing a 4% drop in overseas trading. Similarly, American depositary receipts listed in the U.S. were down 1.2% during premarket trading. On the other hand, futures for the S&P 500 and Dow Jones Industrial Average showed modest gains of 0.5% and 0.4% respectively.
It is crucial for Toyota to address these issues promptly and effectively to restore investor confidence and regain trust among its customers and stakeholders.
Toyota Faces Potential Impact from Testing Irregularities
In the world of investors, there are two concerns regarding Toyota. The first is the issue of testing irregularities, which can have significant consequences. Recalls, on the other hand, generally don’t affect the shares of auto-makers much, as they are part of the safety systems designed to keep cars on the road. Over the past two years, approximately 50 million vehicles have been recalled in the U.S., and out of those, about 5 million belong to Toyota.
However, testing irregularities have the potential to result in substantial fines and affect valuation multiples. A prime example of this is Volkswagen’s experience, when diesel emissions testing problems forced them to pay more than $30 billion in penalties and fines.
Since the discovery of these testing issues in 2015, Volkswagen shares have averaged a price-to-earnings ratio of around 6.5 for the following year. In the five years leading up to the scandal, shares were trading at an average ratio of about 7.5.
One factor contributing to the lower multiple is investors’ aversion to uncertainty. It is challenging to estimate the financial and reputational impact of problems that deviate from the normal process of manufacturing and selling cars.
Prior to Thursday’s trading session, Toyota stock had experienced impressive growth, up approximately 32% year-to-date. This performance surpassed that of its competitors General Motors and Ford Motor Company, the latter having to overcome rising labor costs and a lengthy strike.
