Tesla reported its first profit in 10 years on May 8, 2013 and the market celebrated by propelling the stock price by 24% in after-hours trading. It posted a GAAP profit of $11 million, but this included a one-time DOE stock warrant profit of $10.7 million, which without it the profit would have been a miniscule $548 thousand this quarter. Nevertheless, after ten years and hundreds of millions spent there was finally a small profit, and thus the market rewarded this great feat with a high after-hours gain (hopefully it's not just the short squeeze crowd that thinks this is a great accomplishment). But let us dissect the earnings report and some of the future guidance that investors are tying into this 24% increase.
Future Demand Outlook
Tesla stated that its demand is still going strong with a pace of over 20,000 vehicle orders a year. However, they foresee the less expensive 60 kWh model increasing in the mix of the orders. Although I use the average of 99k per car sold that was posted this quarter in my financial models below, investors should keep in mind that this figure will most likely decline due to the lower 60 kWh vehicles making up a bigger portion of the sales. Lastly, management said that there was a particular region where they were seeing a great increase, but did not identify that region while reaffirming that demand was there. They also said that China is still up in the air most likely due to the uncertainty found in this article. They also rolled out a new financing plan that will not require any money down and a customer can purchase a Model S for as low as $580 per month for personal use and as low as $350 a month for business. They hinted that this has been causing a good amount of interest, but did not share any specifics. While this is attempt to expand their market (maybe they are seeing North American demand decline?) and make it more affordable, we will see if they disclose how well this new plan has worked in future quarters.
Gross Margins were at 17% this quarter and Tesla made a bold prediction that they will be at 25% by Q4. Factoring in all of their expenses including R&D and SG&A expenses their profit margin was right around 2% this quarter. By the end of the year if they hit their 25% gross margin target their profit margin should be around 4.25%. This profit margin is in line with the industry standard which is right around 4% [Ford (F) is at 4.27%, Toyota (TM) is at 3.27% and Honda (HMC) is at 3.72%]. But they did admit that 25% gross margin is still going to be a challenge as they will have to bring more processes in house, get cost savings from suppliers on greater parts volume and invest around 200 million in capital expenditures to make sure all these goals are met. They also announced on their earnings call that no additional revenue from the ZEV (Zero Emission Vehicle) Credits should be counted in Q4 and going forward. Thus with the retirement of the ZEV Credits, higher R&D expenses to complete the Model X and Gen III, and various export costs of shipments to overseas, the margins will be strained and this will be a key metric to watch for in the future. Tesla will be graded on balancing their sales and marketing expansion, possible investment in additional manufacturing plants, employee compensation and lean manufacturing against their revenues to make sure they are not letting their margins slip.
2013 Earnings Estimate
Now that we have looked at the future outlook for a couple of key metrics, we will take a look at an estimate of the rest of the year and then for the next two years. In this model below I have froze the decline of their development services revenue segment and continued it at 6.5 million for the remaining quarters. They noted that they will be in the high teens for gross margin by the end of Q2 and at 25% in Q4, so the cost of revenue has been adjusted (even though it has been increasing a lot in the past several quarters) to meet those metrics. The revenue is modeled after guidance from the earnings call of slightly more than 4,500 units in Q2 (thus I used 4,600 units) and so Q3 and Q4 had to be 5,750 units each to meet Tesla's target of 21,000 vehicles delivered in 2013. Taking away the ZEV credits and development services and dividing that revenue by the 4,900 vehicles delivered the average cost per car was $99,429. This figure should be lower in the upcoming quarters as lower cost vehicles will make up a bigger part of the total mix, but I kept it at 99k per vehicles. I also decreased the ZEV Credit revenue of 68 million by 33% in Q2 and Q3 and took it out in Q4. I was lenient with the expenses, just duplicating the past three quarters for R&D and raising the SG&A by 2.5%, even though with their 200 million in capital expenses and 15 new stores, they will likely be higher.
Based on the above model, the 2013 EPS should be right around $0.35. The Tesla (TSLA) stock closed up at $69 a share at the end of after-hours trading, representing a 205 price per earnings. So this clearly shows the excitement of getting costs under control, processes refined and continued benefits from the ZEV Credit that allowed a slight profit. But based on the projections below, the forecast for vehicles delivered and revenue growth are only at about 50% per year. Although this is a high growth rate for the industry and new cars are in development, it is debatable if this company should be given a 200 P/E or even a 100 P/E. But let us now look at the projections. Per the investor guidance in 2012, Tesla was targeting around 30,000 vehicles delivered in 2014 and then around 45,000 in 2015, both targets including the not yet released Model X. So I took the profit margin estimated in Q4 and translated it to the entire year in 2014 (which again will be hard to achieve as R&D costs can go up due to work on the Gen III model as well as further sales expansion). For 2015 I raised the profit margin by half a percent, even though again this will be a hard task to achieve because they forecast about 45,000 vehicles delivered, which is a 50% increase over 2014.
The model came back showing prices of $24 to $94 per share depending on the different P/E ratios applied. Just like beauty is in the eye of the beholder, the P/E ratio is whatever the market wants it to be. For a company with growth that is under 100% year over year, I personally like to keep the P/E models under 100. I also like to keep the price per earnings right around where the revenue growth looks like it will be for the next several years, so for me the P/E of 50 would probably be a fair assessment of where the stock price should be. Thus from the model, if the middle projection of 30,000 vehicles is met, the price should be right around $47 a share. If the 45,000 vehicles delivered target is met in 2015 it will fetch a higher price at $74 a share due to increased revenue and a higher margin rate contributing to a higher earnings per share. Also I included in a high and low estimate of 2,000 vehicles over and below the middle estimate.
To end this Q1 overview, there are still a couple of important questions that Tesla will have to answer in the next several quarters. They will have to prove the demand for the Model S is still strong and is growing overseas and that orders for the Model X are on the rise. They will also have to get their gross margins up and keep their profit margins from falling. Lastly it is important to note that this year the stock price will be reward purely on the estimate beat and optimistic guidance. Yahoo Finance has the 2013 estimate at $ 0.13 EPS, with a low of -$0.43 and a high of $0.45 (so one analyst will recommend a big buy and one will still be disappointed), so just from my model of a $0.35 EPS they will impress a lot of analysts. But in 2014 the estimate is at $1.34 EPS, which is $0.34 above my high estimate and means they would have to ship around 42,495 vehicles (not sure where they will get such demand in two years) to meet that bottom line (my model assumes a 4.3% profit margin, 99k per vehicle sold). Thus even though the stock is being rewarded with a great P/E this year, the forward EPS target might send the stock back to reality. But who knows maybe they can double their demand and double their output in a year to meet this estimate, time will tell.