Why Toyota Motor appeared on Tuesday

Toyota Motor (TM 3.01%) the stock was up 3% by 9:50 a.m. ET Tuesday after Nikkei Asia reported on a strengthened alliance between the Japanese and German auto titans BMW (BAMXF 1.08%) (BMWYY 0.51%).

According to the report, BMW hopes to produce a mass-market hydrogen fuel cell car within a few years — and it wants Toyota to help.

Toyota and BMW: Better together?

Toyota and BMW will formally announce their expanded partnership early next month at a BMW roundtable, it says Nikkei Asia. Companies are already partnering on fuel cells, but progress has been slow. Toyota, the lead partner in this fuel cell partnership, has managed to sell less than 25,000 hydrogen fuel cell Toyota Mirai cars in 10 years of testing. Meanwhile, BMW’s BMW iX5 Hydrogen car is still experimental.

Under the new partnership, Toyota’s role will mainly involve promoting BMW’s efforts by supplying key components such as hydrogen tanks and fuel cell systems. BMW will adapt its own EV technology to accept electricity from fuel cells to run the vehicle.

What are the advantages of companies? BMW will not have to invest in developing the parts it can buy from Toyota. Meanwhile, Toyota will be able to gain scale in the production of the parts it makes for BMW, which will help amortize its development costs in a larger production base.

Is Toyota stock a buy?

So it’s a win for both companies, although a lot depends on how much higher, the production base grows for Toyota with additional sales of BMW fuel cell cars. And any advantage may take years to materialize.

All that said, Toyota doesn’t need a huge boost from its BMW work to make Toyota stock a winner. The stock is valued at just 7.2 times trailing earnings and pays investors a respectable dividend yield of 2.9%, so even a 4% to 5% annual profit growth rate should be enough to justify buying the stock… and analysts polled by S&P Global Market Intelligence predict a rate of 15% or more.

Sounds good to me.