On Wednesday, we wrote that investors should stay far away from Toyota Motor (TM) following their unprecedented recall of 8 popular models (Toyota’s Stuck Accelerators Cause Investors to Slam on the Brakes). Initial estimates predicted the recall could cost the company as much as $500 million each week until the problem is fixed, but the long term damage to the proud brand’s reputation is much more difficult to assess. Edmunds.com is a leading authority in the auto market and has estimated the Japanese automaker’s sales results for the month of January to show a decline of 12% from a year ago.
That means the first serious nuts-and-bolts numbers from this debacle will come out Tuesday, when Toyota reports its monthly North American sales figures.
Edmunds.com is forecasting Toyota sales will tumble nearly 12% from a year ago, making it the only major car
manufacturer to see a year-on-year decline while the industry overall is expected to post a 16% increase. To put it in perspective, Edmunds even sees General Motors’ sales going up 8.8% last month.
Toyota’s fall from December sales is likely to be even steeper, down 45%, compared with a 32% decline industry-wide. — MarketWatch.com 1/29/2010
Toyota stock fell 12.7% this week, and will likely fall further if a fix is not implemented very soon. The supplier of the faulty part, a small auto-part manufacturer in Indiana, CTS Corporation (CTS) is said to be rushing the redesigned accelerator pedal to Toyota. You can be guaranteed that Toyota will be working diligently to replace that part and repair their wounded reputation as soon as possible. That being said, this episode will drag on beyond when the actual fix is implemented, as Congress has now gotten involved and is conducting its own investigation of the events leading up to the recall. 
The probe will aim to establish if Toyota acted promptly enough to complaints of sticking accelerators in order to avoid further danger to consumers.
We are reiterating out Overvalued stance on both Toyota and CTS as of this week’s market close, and we believe there is far more downside risk than upside potential. The redesigned parts are only part of the solution to this problem, and any findings of wrong-doing or a cover up would further damage the hard fought reputation for quality at Toyota. We have no reason to believe there has been one, but again, we just see far too many risks in the weeks ahead. This episode has been hugely expensive in the near term and may impact sales to a smaller degree for many months to come.
