By David Sterman
Exactly 100 years after Henry Ford launched Ford Motor (NYSE: F), Elon Musk launched Tesla Motors (NASDAQ: TSLA). Despite the massive head start, Ford is now seen as the laggard. By a wide variety of measures, Tesla is held in far higher esteem by investors.
Depending on your view, Tesla's lack of an extensive operating history is either the company's greatest virtue -- enabling engineers to start with a blank slate, so to speak -- or its greatest risk, as the company has miles to go before it becomes a high-volume automaker, capable of making money in any economic climate.
In effect, shares of Ford are valued in the context of where the company has been and where it now stands. Shares of Tesla are valued on where the company is headed. Before we look down the road, let's see how these two stocks compare based on projected 2013 results.
This is truly a breakout year for Tesla, as sales are likely to rise from $400 million in 2012 to more than $2 billion this year. And that figure could approach $4 billion by 2015. Of course, investors are paying up for that scorching growth. Shares trade for more than 100 times projected 2013 earnings before interest, taxes, depreciation and amortization (EBITDA) on an enterprise value. (Shares are still really expensive in the context of consensus projected 2015 EBITDA of $450 million, trading at a whopping 48 times enterprise value.)
To be fair, Tesla's supporters are looking ahead to a 10-year revenue ramp, as the automaker gets set to enter the mainstream auto market with a moderately priced sedan in 2017. Analysts at Merrill Lynch looked ahead to 2020 to speculate on what kind of sales volume is needed to simply justify the current stock price. "We estimate that Tesla's current share price implies approximately 628,000 vehicle sales in 2020 (versus an estimated 21,000 units in 2013)," they note.
And that assumption comes with a projection of 12.5% EBIT margins by 2020. And this is where the bull case for Tesla gets tricky. Those kinds of margins are only garnered by top-end automakers such as Porsche and BMW. Yet the bulk of Tesla's sales are expected to come from its Gen 3 sedan, slated for release in 2017. That car is expected to go head to head with the Ford Fusion, Toyota (TM) Camry and Honda (HMC) Accord, all three of which are making tremendous strides in terms of drivetrain electrification.
If Tesla were to sell 628,000 vehicles by 2020, then roughly 500,000 would likely be for this Gen 3 sedan. As Merrill's analysts conclude: "Therefore, the Gen 3 would theoretically need to be among the best-selling vehicles in the world to drive the 2020 volume that appears to be implied in the current share price. While not impossible, these demand forecasts, similar to the 12.5% EBIT margin assumption, seem extremely optimistic and are likely to disappoint, in our view." That's why Merrill expects this stock to fall to just $45.
Let's take a closer look at the Gen 3 model. Details remain scarce regarding pricing, but Wedbush Morgan's analysts predict that the all-electric midsize sedan will sell for between $35,000 and $45,000. As a point of reference, Honda's new Plug-In Hybrid Accord starts at $39,000.
But Honda expects few buyers to actually buy this vehicle. Instead, they believe most buyers will opt for a basic Accord Hybrid (which has a smaller battery but also sells for $10,000 less and gets 50 MPG in the city). As a recent article in Autoblog notes: "We were suitably impressed by the Accord Plug-In, but Honda is doing its best to make that vehicle irrelevant with the Accord Hybrid, which makes a whole lot of sense compared to its pluggable brother - a car that is still only available in New York and California. You lose 12 miles of (electric vehicle) range but save $5,000-$10,000."
In effect, expecting Tesla to sell the relatively pricey Gen 3 model to the tune of 500,000 units annually simply looks unrealistic, unless the price is a lot closer to $30,000, and at that price, it's unclear if the car would be profitable to produce.
My greatest concern is that investors are miscalculating Tesla's trajectory. Although sales growth will likely be a robust 50% in 2014, analysts expect sales growth to cool to just 10% by 2015.
The bear case has already been made for Tesla among many financial writers. I offer up my own mea culpa. When I looked at Tesla a few years ago, I underestimated just how good the company's sedans were. They are truly revolutionary in many respects, worthy of all the automotive press's accolades. But there is simply no way to square this stock's market value with even its best-case sales and profit scenarios.
Deep Value In Detroit
The contrast between Tesla and Ford is so striking simply because Ford is one of the most inexpensive blue-chip stocks around. Even as shares have moved up off of their 2012 lows, they still possess solid upside.
This past spring, I laid out the bull case for Ford, noting that Ford is on the cusp of a major product cycle upgrade in 2014 and 2015, including an all-new Mustang, Taurus sedan, and a radically lighter pickup truck, thanks to more extensive use of aluminum.
On the face of it, shares of Ford appear attractively valued at around 8 times projected 2015 profits. But the real story here is free cash flow, which hit $3.9 billion in 2012 and is expected to be a record $6.7 billion by 2015, according to Merrill Lynch. That's a 20% annual compound growth rate. That also means that Ford will generate a 10% free cash flow yield by 2015.
Risks To Consider: Auto sales trends have benefited Ford, Tesla and others, but an economic clump would create pressure for all automakers.
It's crucial to separate out the fact that Tesla is a great company with an absurd stock price. Ford is an almost great company with a far, far cheaper valuation. The setup is in place for a pairs trade for these two automakers as investors eventually start to see the wide gulf in their valuations.