Tesla Motors, Inc. (TSLA) is a major automotive manufacturer developing and producing electric cars. The company believes in innovation beyond the internal combustion engine and believes in moving past dependence on oil as a crucial element of the automotive industry for the 21st century. Other companies in the market have versions of eco-friendly automobiles but Tesla Motors offers an exclusively electric version.
At this time, The Oxen Group has maintained its rating at Hold for TSLA with a price target at $39. During the recent fiscal years, TSLA has operated at a steady loss but shows promise for the future. The company is projecting high growth but the company's current valuations show that TSLA is fairly valued at this time. This combination of low performance with real potential is why we have rated TSLA as a Hold.
Tesla Motors, Co. is an automotive manufacturer based out of Palo Alto, California that specializes in electric automobiles. Founded in 2003, this company currently offers a sport "Model S" and a utility "Model X" that boast remarkable acceleration and excellent mileage per charge all with zero tailpipe emissions. Tesla offers the option to buy online, by phone, or at any of their stores and galleries across the nation. Along with these stores Tesla offers service centers. For owners who do not have a service center in their area Tesla offers a Service Ranger Visit where owners can take advantage of a house call for service needs. In 2012 Tesla opened its first store in Canada and announced its plan to start construction on a European headquarters in the Netherlands spring of 2013.
TSLA currently has no PE due to its continual operation at a loss, though it does show an extremely high future PE just under 270. While Tesla's habitual operating loss is concerning, the company is showing growth potential in the coming year. How confident can we be in this projected growth for TSLA?
TSLA recently reported a negative net income at -111 for Q3, an even larger loss than the previous fiscal year's Q3 at -65. TSLA is showing extremely low numbers this quarter with a net margin at -266% and an operating margin at -263%. Again the ROE is showing red at -3.8% as well as the ROIC at -80.1%. Competitors such as Ford Motor Co (F) report higher key ratios such as ROE at 142.5% and ROIC at 148.6%. General Motors (GM) reports ROE at 13.5% and ROIC at 8.6%. Obviously the company is lagging due to its lack of profitability, but as an investment, this is necessary information. Investing in TSLA is investing in speculation.
With 2012 being a big year for Tesla opening its first Canadian store and establishing plans to begin construction on its European headquarters in the Netherlands for spring of 2013, the plans have been made but the profits have not been generated yet. TSLA must execute their plans and see profits quickly in order to realize the growth analysts have projected. The current margins TSLA is reporting are negative aspects of the company's valuation while the future PE is where we see the positive. The uncertainty of TSLA's future is what is holding their projected stock price at a steady level.
What is the catalyst for upside or downside? As stated before, TSLA's future growth depends on how successful recent and future expansion projects into Canada and Europe prove to be. 2012 was the year TSLA tapped into the Canadian market and opened their first store in Toronto. While there is great potential for profits, it is not guaranteed. TSLA also has plans to open more stores and service centers domestically. In North America, there are currently 24 stores and galleries with plans to open 3 more. TSLA has 17 service centers across the nation with plans to double this number over the next two years. Across the globe, TSLA has 9 stores and galleries with 7 service centers in Europe, 2 stores & galleries, and 2 service centers in Asia, and one each in Australia.
Chairman, Product Architect & CEO Elon Musk recently reassured TSLA customers and enthusiasts that production is on an incline. Some of the recent lull in production, Musk attributes to first-time full-body manufacturing with a new team through new suppliers. During the third quarter TSLA saw 359 cars manufactured with 250 delivered to customers. TSLA forecasts 2,500 to 3,000 Model S vehicles produced in Q4 and over 20,000 in the year 2013. All this investment could pay off but most likely not in the next fiscal year. Presently, TSLA offers an exclusive product, which provides them a substantial economic moat.
Economic Moat -
TSLA is currently the only auto manufacturer to produce 100% electric-run automobiles. We are hoping that as TSLA increases its efforts to augment production in markets worldwide we will see better economies of scale. Ford Motor Co now offers a hybrid and a C-MAX Energy technology that is inching closer to complete dependency on electricity but is not yet there. General Motors offers similar options with hybrid models that depend less and less on gasoline. With a strong hold on the market for 100% electric cars, the coming quarters' expansion projects will only strengthen TSLA's presence and reinforce already existing barriers to entry against competitors. Another aspect of TSLA's unique product is the luxury. Not only does TSLA provide a product that is free from any dependence on gasoline with zero tailpipe emissions, these models are also top-of-the-line sport or utility vehicles. Advanced technology does not sacrifice luxury in this case.
Revenue and EPS Outlook -
As the following numbers explain. We anticipate that over the next five years TSLA will move from operating at a loss of -400M in 2012 to a considerable profit in 2016 of 300M. Though these numbers are reassuring, there is still uncertainty. The current EPS stands at -3.69, another negative figure. TSLA increased R&D expenses by 19% to 55M, mostly due to changes in manufacturing and taking on more operational responsibilities at the Tesla Factory. In their latest press release reporting Q3 results, TSLA has set a goal of a gross margin at 25% in 2013 to keep in line with manufacturing goals and efficiency initiatives. With so many projects working towards higher production to a wider market 2013 could be the year for a better, positive EPS for TSLA but it's still to be seen if that will actually occur.
Price Target Analysis
The following price target was configured through a 5-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices.
Here is how to calculate price targets using discounted cash flow analysis:
(all figures in millions)
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012).
WACC for TSLA: 6.00%
PV Factor of WACC
PV of Available Cash Flow
For 2016, we are going to calculate a residual calculation, as we believe that the market tends to value companies with around a five-year projection of where business will be. This is the common projection for discounted cash flow analyses.
For the fifth year, we calculate a residual calculation. This number is calculated by taking the fifth year available cash flow and dividing by cap rate, which is calculated by taking WACC and subtracting out residual growth rate. Residual growth rate is typically between 2-6%. 4% is average growth for industry. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. This is why higher growth companies tend to have higher PE ratios.
Cap Rate for TSLA: 4.0%
Available Cash Flow
Divided by Cap Rate
Multiply by 2016 PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
We have added in current cash/cash equivalents as of the latest fiscal quarter along with debt levels.
Divide equity value by shares outstanding:
In the end, we have found that TSLA is worth around $39, which we believe accurately reflects the company's five-year projections.
Profit/Value Industry Comparisons
Q1 - Q3 2011
Return on Equity
TSLA is not currently showing any profitability, but as we have already addressed the coming quarters should begin to see a change and the stock is priced accordingly. We will learn more comparing to other auto manufacturers such as Ford Motor Co, General Motors Company, Drew Industries Inc. (DW), and Thor Industries Inc. (THO). F has an operating margin of 4.3%, a gross margin at 16.3%, and ROE at 142.5%. GM has an operating margin of 3.9%, a gross margin at 12.1%, and ROE at 12.3%. DW reports an operating margin at 7.3%, a gross margin at 81.1%, and ROE at 10.3%. Lastly, THO has an operating margin at 5.7%, their gross margin at 11.5%, and ROE at 3.5%. TSLA sits consistently at the bottom for all three percentages when compared to these similar companies.
F operates with a 9.2 PE and a 7.8 future PE. GM operates with a 10.6 PE and a 7.7 future PE. DW operates with a 22.7 PE and a 16.9 future PE. THO operates with a 17.2 PE and a 12.2 future PE. TSLA's valuation matches its profits; there are disappointing numbers for the present but potential for extreme growth in the future.
We anticipate TSLA to begin to turn profits in the next fiscal year due to increased production of their product, expansion into foreign countries, and increased presence in stores and service centers across the country. This profit margin is expected to start this coming fiscal year and remain steady throughout our five-year price target analysis. Although all the elements for success are in place, there is a certain amount of uncertainty so this is why we do not expect higher stock prices in the future or a Sell rating.
The Bottom Line
The Oxen Group sees the potential for TSLA, but also understands the risks. This company currently has a great product with a strong economic moat but there are a few factors holding back this company. It is still in the expanding phase, and currently cannot produce the quantity of vehicles to match the demand. With the recent and future expansion plans TSLA may begin to meet the current demand. While we do recognize a strong economic moat for TSLA, other major automobile manufacturers like Ford and Nissan are concentrating their efforts and clean energy technology and could encroach in this segment in the future. Because of the mix of growth and risk we believe a Hold rating is appropriate for TSLA until we see how the next steps of this company unfold.