Why Toyota Stock Is Beating GM and Ford, and Why That Might Change

It’s easy to credit Toyota’s focus on hybrids and its relatively slower investment into all-battery electric vehicles for the outperformance, while blaming GM and Ford for going too far, too fast in their pursuit of battery-electric technology. Some of the numbers bear it out. In its fiscal year ending in March, Toyota expects to sell some 3.9 million electrified vehicles—mainly hybrids—worldwide, accounting for roughly 38% of total sales. In 2021, electrified sales accounted for just 24% of total volume. Hybrids have been selling like hotcakes.

What’s more, Ford just reported a 2023 loss of $4.7 billion in its EV division called Model e. It expects that division to lose about $5.3 billion in 2024.

Those numbers don’t lie. But they don’t tell the entire story either.

More than 90% of Toyota’s electrified sales are so-called mild hybrids. Think the original Prius. Those cars don’t plug in. A small battery and electric motor boost miles per gallon. As for cars that plug in, Toyota’s plug-in hybrid, or PHEV, sales, and battery-electric vehicle, or BEV, sales are expected to amount to roughly 300,000 units in fiscal 2024, or less than 3% of its total, up from about 1% of sales in fiscal 2021.

Cars that plug in accounted for roughly 3.5% of Ford’s 2023 U.S. sales volume, up about two percentage points from 2021. Plug-in cars account for about 3% of sales at GM, up about two percentage points. Toyota, GM, and Ford all have made similar plug-in gains over the past two years.

Still, Ford has those losses. It’s also the only one of the three that talks explicitly about its EV losses, which include some $4 billion of R&D spending a year, according to Freedom Capital Markets analyst Mike Ward. GM, for its part, talks about unprofitable EVs. U.S. investors don’t hear all that much from Toyota.

Despite its EV losses, Ford generated some $10.4 billion in operating profit in 2023. Adjusted for the impact of the UAW strike, Ford generated more than $12 billion, a record. GM and Toyota also had record, or near-record, years in 2023.

Plug-in sales and profit figures appear to show that GM, Ford, and Toyota performed similarly in 2023. One difference among the three is EV-related hype.

Technology consulting firm Gartner has what it calls a hype cycle, which plots expectations versus time. Sections include a period of inflated expectations, the trough of disillusionment, the slope of enlightenment, and the plateau of productivity.

It sounds like navigating through a nerdy videogame quest, but the pattern is instructive. For BEVs in the U.S., the period of inflation expectations happened in late 2021.

Identifying that peak is easy.

Tesla

stock traded above $400 a share in November 2021. GM shares traded above $63 the same month. Ford shares traded above $25 in January 2022. Now Tesla, Ford, and GM trade at $189.156, $12.83, and $38.65, respectively.

During the inflated expectations phase, the mere mention of EV spending could send stocks higher. In mid-2021, GM announced plans to spend $35 billion on EV development between 2021 and 2025. Ford said in March 2022 it would spend some $50 billion on EVs by 2026.

Impressive numbers, but both were aggregated goals over multiple years. From 2021 to 2023, Ford spent about $21 billion on new plants and equipment, representing about 4.5% of total sales. Ford spent $22 billion on new plants and equipment from 2017 to 2019. (Spending and sales dipped during the onset of COVID-19 in 2020).

GM spent $27 billion on plants and equipment from 2021 to 2023, up about $2 billion from the $25 billion spent from 2017 to 2019. Comparable numbers for Toyota are about $39 billion from 2021 to 2023 and $38 billion from 2017 to 2019.

Despite the rhetoric, or lack of rhetoric in the case of Toyota, none of the three have materially changed spending patterns. Ford and GM simply talked about EVs more.

Toyota, of course, is spending billions on EVs. Tuesday, it announced a $1.3 billion investment in Kentucky where it will assemble a new three-row all-electric EV for the North American market.

The lack of overpromising might be why Toyota shares trade for about 10 times estimated 2024 earnings while Ford trades for less than 7 times, and GM shares trade for less than 5 times.

Another reason for the valuation difference is simply geography. Japanese investors pay more for car stocks.

Honda Motor

trades for 8 times estimated 2024 earnings, not quite Toyota but better than GM and Ford.

Japanese investors are the main owners of Japanese car stocks and they read Japanese-based research. The Japanese-based analysts project growth for Toyota and Honda. Analysts expect Toyota’s operating profit to hit $44 billion in 2026, up some 40% compared with 2023. Analysts expect Honda’s operating profit to rise about 20%.

U.S.-based analysts expect operating profit at Ford and GM to be lower in 2026 compared with 2023. Why pay up for a company with declining earnings?

Before investors rush to the conclusion that Toyota is simply a faster-growing company, consider that operating profit between 2013 and 2022 was essentially flat.

This past year was strong for Toyota’s stock, but for now, it’s the outlier. Maybe it’s the start of a new trend. Or maybe it’s just the yearly fluctuations of the global automotive market. If it’s the latter, then Ford and GM shares might be the better bet for the coming year, no matter what the prevailing narrative says.

Write to Al Root at allen.root@dowjones.com