Toyota Stock Jumps 7.8% on Rumors of Ambitious ROE Goals

Highlights

• Toyota’s stock surged 7.8%, driven by rumors of plans to double its return on equity (ROE).
• While Toyota did not officially confirm the goal, speculation suggests the company may target a 20% ROE in the near future.
• Investors should be cautious, as Toyota's stock is trading at a relatively low valuation, with minimal profit growth expected.

Toyota Motor’s (NASDAQ:TM) stock surged 7.8% at the time of writing on Thursday, following reports of rumors that the Japanese automaker is aiming to double its return on equity (ROE). This speculation about Toyota’s potential future financial performance is driving investor optimism, despite the lack of official confirmation from the company.

The surge in Toyota’s share price comes after Bloomberg reported that expectations are high for the automaker to improve its profitability, with rumors circulating that the company wants to achieve a 20% ROE, up from the 11% ROE it expects for the current fiscal year. The initial speculation was sparked by a report from Nikkei Asia, which cited an unnamed company executive discussing Toyota’s ambitions.

However, a closer look at Toyota’s recent financial statements, released on November 6, shows no explicit reference to a 20% ROE target. Instead, Toyota’s first-half ROE for fiscal 2024 was reported at 11.1%, down from 17.2% during the same period the previous year. The company has hinted at efforts to increase shareholder returns, including additional share buybacks, but has not confirmed the rumored ROE target.

Is Toyota Stock a Buy?

Despite the strong market reaction, investors should approach Toyota's stock with caution. The company is currently trading at nearly 10 times trailing earnings, and its free cash flow is negative. Additionally, Toyota is expected to see minimal profit growth, with projections suggesting less than 1.5% annual growth over the next five years.

While the company’s efforts to improve its ROE may indicate a potential for better financial performance, the rumors remain speculative. Automotive competitors, such as Honda Motor, offer more attractive valuations and growth prospects based on current metrics, making them a potentially more favorable investment at this time.