That multiple is in-line with our estimate of the company's earnings growth over the next five years.

Toyota Keeping Fit in Lean Times

Toyota Motor Corp. (TM) continues to expand its production capacity to increase efficiency, meet local demand and simultaneously powering it to emerge as the world's financially strongest automaker. Its strong presence in North America has been further consolidated by gaining market share from leading U.S. automakers.

Moreover, the company also has a strong cash flow and a strong balance sheet. However, a sluggish US economy, rising costs, pricing pressures and huge capital expenditures prompt us to rate the stock a Hold with a six-month target price of $86.00.

Demand for Toyota's vehicles remains strong and sales were higher in its key markets in 2008. The firm dominates the hybrid market with its Toyota and Lexus offerings as well as the Prius hybrids. It is concentrating on upgrading the performance of its hybrid systems and plans to manufacture these vehicles in Thailand and Australia. The Australian government would provide a subsidy of $35 million for the operation.

By 2009, Toyota forecasts total sales of 2.4 million vehicles in Japan. The company's fifth engine plant in Japan is likely to start with an annual production capacity of approximately 200,000 units in 2010. TM plans to sell 1.45 million vehicles in 2009 in Europe, an increase of 11.5% from the 2008 forecast. The company plans to sell Camry sedans, compact RAV 4SUV and Prius in South Korea from 2009.

With Chinese automaker FAW Group, Toyota plans to set up a new production center. Toyota also plans to construct a second plant in India. The Texas plant will expand the production line and strengthen the self-reliance of overseas operations.

Toyota is raising prices of its domestically sold vehicles by 1-3% due to higher raw material prices. The company has also initiated value innovation activities, leading to cost efficiency. Toyota plans to generate annual cost reduction of $2.9 billion.

Costs Create Headwinds for RC2

We rate the shares of RC2 Corp. (RCRC) a Hold prior to the release of second-quarter financial results. The company has described 2008 as a transition year but we anticipate only modest sales growth, and expect that growth to be back-end loaded, with a decline in year-over-year sales during the first half of the year.

An aggressive acquisition strategy and increased exposure to the infant and preschool market are the positives associated with RC2. Going forward, we expect to see improvements in sales trends in the feeding care and play segments, as the company introduces a number of innovative infant and toddler products under The First Years and Learning Curve brands.

Lackluster demand for Racing Champions products, rising costs, and poor domestic toy market conditions are among the primary negatives associated with RC2. RC2 faces higher labor, tax and currency costs passed on by Chinese contract manufacturers, and expects a significant impact of these expenses on its 2008 profit. The overall economic conditions, particularly for U.S. consumers, also remain a threat to the company's earnings.

Given the operating challenges faced by RC2, we consider a discounted multiple, relative to the peer group average, to be appropriate. The peer group is currently trading at an average P/E multiple of 12.5x 2008 earnings estimates, with larger peers Hasbro (HAS) and Mattel (MAT) trading at multiples near 15x projected 2008 EPS.