Toyota Motor Corp posted a stronger-than-expected set of Q3 FY’23 results on Thursday. Revenue grew by 25% versus last year to 9,754.6 billion yen (about $74 billion), driven by rising volumes and a weaker Japanese yen. Deliveries for the quarter rose by about 16% year-over-year to 2.33 million units. Toyota’s operating profits also expanded by about 22% to 956.6 billion yen ($7.3 billion), although operating margins faced some pressure, declining from around 10.1% in Q3 FY’22 to 9.8% in Q3 FY’23, due to elevated raw material prices and energy costs.

Now, Toyota’s guidance was somewhat weak. The company essentially reiterated its forecast for an annual operating profit outlook of about 2,400 billion yen ($18.3 billion) for FY’23. Considering that year-to-date profits for the first nine months of the year already stand at about 2,098 billion yen (about $16 billion), this implies profits of just about 300 billion yen ($2.3 billion) for Q4. We think this is conservative, and believe the company will surprise on the upside.

Although the guidance was tepid, we think that Toyota stock warrants a look at current levels of about $145 per share. Toyota currently trades roughly 14x its earnings guidance for this year, which is well above peers such as GM and Ford who trade at single-digit multiples. We think that Toyota deserves a premium, given its highly efficient manufacturing and considerable scale, being the world’s largest automaker. Moreover, there are some macro trends that could benefit Toyota and other automakers. The commodity price environment is improving with inflation easing. Semiconductor and supply chain issues are also likely to ease, helping supply. At the same time, demand remains strong and consumers have been willing to spend more per vehicle. This could help profitability going forward. Toyota, too, is looking to make its lineup more premium, launching the new Grand Highlander, which is an upgrade to the company’s segment-leading Highlander midsize SUV. Toyota is also taking measured steps towards relating to electrifying its lineup by spreading its bets across hybrids, hydrogen, and EVs. Toyota’s overall electrified vehicle lineup is expected to account for about 29.4% of its deliveries this year, up from 28.4% last year.

We value Toyota stock at about $185 per share, about 28% ahead of the current market price. See our analysis of Toyota Valuation for more details on what’s driving our valuation for Toyota. Also, see our analysis of Toytota Revenue for more details on Toyota’s key revenue streams.

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