Tesla (NASDAQ:TSLA) has had a phenomenal year thus far, becoming a $21 billion company as its red-hot stock price is up over 400% year-to-date. And many speculate as to what exactly investors are paying for as the stock hovers around $170/share. Tesla trades at more than 100 times 2013 earnings, so future growth is clearly priced into the share price. This article examines what investors may be looking for from Tesla ahead of its potential entry into a fast growing segment of the auto industry: pickup trucks.
Pre-recession pickup truck sales in the United States approached 3 million units, a sizable chunk of the overall auto industry. Last year, the automakers sold 1.9 million trucks, and are on pace to overcome that number quite handily this year. Already, the pickup truck segment has sold approximately 1.44 million units through August, or around two-thirds of the year through. This would indicate that over 2 million pickups will be sold this year, approximating 10% growth in the sector. Can this growth continue, and will Tesla be able to enter the market soon enough to capitalize?
Although recent data suggests that the housing recovery might be slowing a bit, with existing home sales falling a somewhat negligible 1.9% month-over-month, the sales represent a 10.7% increase from year ago levels. The fact remains that interest rates are still at historical lows, even if they have risen substantially from earlier this year. What this means for pickup truck sales is that the housing recovery is still underway, and this portends that construction and homebuilding will continue to prime demand for trucks. The homebuilders, companies like Lennar (NYSE:LEN) and KB Home (NYSE:KBH), recently reported strong earnings, and have shown that builders have increased production as inventories remain low. Companies like Home Depot also have reported strong quarters, coincidentally verifying that demand for new homes continues. This has been a boon for the pickup truck industry.
Tesla's chief designer famously acknowledged how the pickup truck market can be exploited by the company, as "the torque of an electric motor would be ideally suited" for a pickup truck. CEO Elon Musk also hinted that he "would love to do a pickup truck" that might boast "dynamic air suspension & mega torque." The 2 million unit, and growing, market could provide an appealing opportunity for Tesla.
Ford (NYSE:F) currently is the leader in the pickup truck segment with its F150 model, selling almost 500,000 units so far this year. With the Chevy (NYSE:GM) Silverado at over 300k, the Ram 1500 over 200k, and the GMC over 120k, the competition is undoubtedly fierce, but there appears to be plenty of sales to go around. Yet as Tesla has demonstrated in the luxury car segment, it need not break into the market and gobble up market share immediately; even a 2% market share could have Tesla selling around 40,000 trucks a year, if it had the capacity to do so. This would add over 3,000 autos sold a month for Tesla, more than half of what it currently sells with just the Model S. If it continued to grow from a 1 or 2% market share, to something on the level of a Toyota (NYSE:TM) Tacoma (selling over 100k trucks so far this year) Tesla could benefit handsomely from its entry into the pickup truck segment. And it could be ready to break into it with the advent of a new factory in Texas.
Musk apparently has plans for a Texas factory pending a potentially game-changing law: allowing EV makers to sell cars directly to customers. The CEO believes that the new law could prime annual sales in the state to 2,000 vehicles or more; a factory manufacturing a pickup truck in the Lone Star State could only add to the number. Unfortunately, the National Automobile Dealers Association (NADA) has been fighting tooth and nail against these efforts, as the organization feels that other automakers could try to do the same, leaving dealerships out in the cold. And the bill never passed the Texas House, though State Rep. Eddie Rodriguez has vowed to continue the effort.
The ability of Tesla to sell directly to consumers in Texas may seem like a make or break, according to Musk, Tesla's California plant still operates at hundreds of thousands of units below its capacity. Breaking into a market that sells 2 million units a year remains attractive, especially given the unique characteristics a Tesla pickup could offer that are absolutely appealing, namely substantial torque and the minimization of fuel costs, both extremely important to potential buyers. Even $4 gas has not hampered the growing pickup truck segment, and as long-term fuel costs are sure to continue to rise, Tesla has even more motivation to break into the market. Whether it can do so while a recovering housing market stabilizes in the future remains to be seen, but given pre-recession levels topping 3 million trucks, the future is bright for the automakers capitalizing with attractive pickup trucks. Tesla should do the same.
Disclosure: I am long TSLA, F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.