The market dropped for five days before it rallied significantly to close out the week. The reason for the rally was a better than expected jobs report from Nonfarm Payrolls as well as a drop in the unemployment rate to 7.0%. This move came, though, after the market got good news throughout the week that made it question whether or not the Fed would taper in December or wait until 2014. That storyline is likely to dominate the market in what is a lighter week for data. Additionally, retail data for holiday shopping as well as important news overseas should give the market most of its move this week.
The S&P 500 (SPY) broke out, dropped, and now is nearing resistance again 1810. The index has been following an upward wedge, but it needs to move over 1810 to see more upside. Support is at 1790.
The Dow Jones (DIA) is also looking to breakout over the 16100 level as it finished last week over the 16000 line. DIA was looking strong but dropped back to 15800 area, which is now support.
Wholesale Inventories - October
JOLTS - Job Openings - October
Initial Claims - 12/7
Retail Sales - November
Export/Import Prices - November
Business Inventories - October
PPI - November
The economic calendar is very light this week with the big report being retail sales on Thursday as well as initial jobless claims. Retail sales will be for November, so they will show the important Hanukah and Black Friday shopping season. Jobless claims will be the best signal for taper on the data side, as it should give the market some important signals. Those signals will be crucial to the market to understand if the Fed will taper or not. We get PPI on Friday as well as import/export prices, which will be a signal as well for taper.
Outside of the USA, foreign markets will likely play a big role with a limited amount of data and news expected for the market this week. Things start on Monday with Japanese GDP, Chinese CPI, and the Euro-Zone Sentix Investor Confidence index. Pricing in China is crucial to the market. On Tuesday, we get Chinese industrial production data as well as Italy's GDP. Thursday is another big day with the monthly ECB report as well as Eurozone industrial production. China and Europe are crucial to this week, and the market, as a whole needs these markets to continue to rebound to have a successful 2014.
Adobe Systems (ADBE)
Earnings are fairly light this week with Costco , Adobe , AutoZone , PVH , and Lululemon being the key reports this week. It is obviously a light earnings week, and none of these reports can move the market. Yet, these are key reports that can have a significant impact on their industry as well as individual name. It will be interesting to see how COST, PVH, and LULU discuss how they are seeing holiday shopping going so far. ADBE is another interesting report to se how tech is going, while AZO will give us the health of the automotive industry.
We want to take a deeper look at Lululemon today. The company is Sell-rated by us with a 12-month price target of $58. In our last report on LULU on 9/9/13, we put forth our reasons for disliking LULU as mostly due to it being overvalued, lacking a vision for international growth, and having tough comps/rising competition. None of these things have changed over the past several months. The stock is still quite expensive, priced at nearly 10x book value, 28x future earnings, and 7x sales. The company still has not named a new CEO six months after Christine Day noted she was stepping down. The earnings report this week is a big one. The last report was weak as the company saw supply chain issues delivering fall lineup to stores in the necessary time as well as continued issues with their "luon" line, which originally had issues due to sheerness.
In this week's report several factors will be important to watch. First off, has the company found a new CEO. It is time they get one to help direct the next path for the company, and if they are still not set, it would be a sign of a weakness for a company that is starting to appear like it may have grown faster than it was ready to grow. Continue supply issues, quality control, holiday season lines, and CEO searches are all giving the company a less than stellar image. Further, we will be watching to see how the new FY is getting started as well as the forecasting for 2014. The company's latest quarter takes them through October of 2013, so they should have some information for how November and December are doing.
The issue is that the company is priced to grow, and they need to not only deliver strong growth but also a lot more. They need a CEO plan as well as improvement in luon. They need to show supply chain issues are not consistently a problem, and they need margins to stay strong. Competition would be best seen through margin drops, so we will be watching for that as well as any other conversation about competition like Under Armour (UA).
Overall, LULU's earnings are the most exciting report of the week in our opinion.
The Fed will likely take over as the most important indicator/catalyst for this week. Next week is the December Fed meeting, which will likely be a potential taper or not taper moment. Arguments exist on both sides of whether they will or not. On the they will side is that many Fed regional presidents have started acting more wholly hawkish and even doves are starting to say taper will happen. Data, additionally, has been solid and could support a move. At the same time, that data has been short in timeframe and inconsistent. Further, many speculate whether Ben Bernanke would want to taper while a lame duck basically. The stage should be set early with three different Fed regional presidents speaking on Monday in Lacker, Bullard, and Fisher. That will be the main chance for a message to be sent. There is one other speech but it's from a low-ranking official. Speculation will be the key…
It is an interesting week, but it is light in developments. Sometimes, weeks like this are times when we see major movement as investors/traders anticipate what is next. Other times, it is very light in movement overall. We expect something in the middle. Taper or not to taper will be the story, and that will move the market. While to taper or not to taper will definitely be key to the market's eventual move up or down, the developments in between will be the important part.
Ticker: Tesla Motors (TSLA)
At the beginning of 2013, we were telling our clients to buy Tesla. The stock was cheap, undervaluing future potential, and had all the potential to catch fire (the stock that is). Yet, when the stock pushed over $100, we saw it as getting overvalued and moved from a Buy-rating to a Sell-rating. Since our last article where we pushed our Sell-rating on October 25, the stock has dropped over 20% once down 30%. In that report, we put forth a model for $100 price tag. Since that report, the company released its latest earnings and several other announcements, and we want to adjust our model.
In our last article, we discussed the transfer of domestic performance and success to the international scene as well as what a price target of $100 means as far as actual sales are concerned. In that model, we price that the company can reach 90K units in 2017 with an operating margin around 15% (similar to their goal of Porsche margins). In that best-case scenario, we still can only come up with $100. What we will do is highlight some of the reasons, we had laid out for why we don't see higher prices than that followed by if our opinions would have changed based on data/earnings since then.
In our latest article, we noted that the company has had success in the USA, but the need international markets to meet the 90K level and beyond:
Tesla is pursuing an aggressive path to expansion both domestically as well as internationally. The Model S has sold around 15,000 models since its debut and the demand is expected to ramp up to around 20,000 per year moving forward. Customer opinion on the model has been so far positive, scoring a perfect score in terms of safety and reliability. Whereas domestic sales are picking up, international sales are still in early stages. Sales in North America have jumped more than 3600% year over year for the first half of 2013, whereas European revenue growth was cut by half in the same period, suggesting European sentiment for Tesla may not be as strong as it is domestically.
YTD through October, the largest volume high luxury car sold in the USA was the BMW 7-Series with just over 9000 units sold. That puts the car on pace for 12K for the year. Even if Tesla can become the top luxury car company in the USA, they would be pressed to sell more than 15-20K of their current lineup and more than 30-40K with some of the new cars they have in the pipeline. Thus, the company needs international sales to reach the 90K level we are looking at for them.
So, how is that going? Here were some comments in the latest call from CEO/Chairman Elon Musk about moving international
The thing that we are looking at doing in '14 is expanding Model S deliveries worldwide, particularly into Asia and then more broadly into Europe and as well as the other parts of the world. So it's kind of an international expansion and volume production expansion with Model S and then development to the Model X. It is just refining all of that, getting it really in place and building out a really high volume production line, kind of next generation production line for the S and X.
In the latest quarter, the company made over 1000 deliveries to Europe, and the company is starting to ramp up business overseas. The most successful market right now looks to be the Netherlands, where the company has assembly capabilities and can test several hundred cars per week for the rest of Europe. The question, though, remains; can Tesla be successful in Europe?
One of the biggest issues facing Tesla is infrastructure of charging stations. European nations are smaller and many Europeans like to drive from country-to-country for travel and even on weekend getaways. If owners are worried about powering up in another nation or even in their own nation, it may deter them from buying. The problem for TSLA is that the infrastructure to do that is expensive. Business Insider laid out this issue interestingly:
Tesla wants to meet its Supercharger charging station target in Germany by the end of 2014. It's trying to build in a few years what traditional car companies have spent decades doing. This gets to the heart of the short thesis on the automaker's stock. Tesla bears say quarter after quarter that the company is burning through cash too quickly to build the infrastructure it wants, and make the improvements to supply chain that it needs. Bank of America analyst John Lovallo addressed that directly on the company's Q2 conference call, saying: "If we think about cash flow for a minute... free cash flow was a use of about $79 million in the quarter, and I think if you make the adjustments you guys were talking about... $11 million for the DOE payment, a $67 million increase in receivables that may not occur. That looks like the use of about a million dollars. Now, you have cap ex ramping up in the back half of the year so how are you thinking about free cash flow generation through the remainder of the year into 2014?" Tesla CFO Deepak Ahuja could only reply that Tesla "want[s] to be very careful about burning cash...We want to stay as close as we can to a free cash flow position... but that's not something we necessarily want to guide to. We're going to manage it... and spend the cap ex where we need to to ensure we're growing at the right pace."
For now, we still believe our 90K model is still the best-case scenario. Nothing has made us change that opinion so far. In this report, we will breakdown just how that would play out for Tesla.
Revenue - If we use a 90K unit model for 2017 with an average sale price of $70K (assuming that some newer SUV models will catch a higher price tag), we can see revenue will likely be at around $6.3B. This is the best-case scenario as we see it now. It assumes ASP rises as well as they reach a very strong unit growth with success in international markets.
Operating margin - Margins are expected to grow, and here again, we can give the company the best possible scenario. The company has noted they want to be similar to Porsche in their margins coming in around 15-17% (potentially higher). Those margins are much higher than the -8% operating margin that the company has had in the TTM.
Let's take those starting factors and put them into a model using a very low eventual 15% tax rate (we expect this to say low due to tax breaks as well as previous losses). Capex is a point of discussion, and we will try to keep it around 10-12% of revenue as the company has a lot of infrastructure spending to do. We use a cap rate of 2.6%, which is literally one of the lowest discount rates possible. The fact is that in the very best of scenarios, this stock is worth about $100. In a more realistic setting around $75-$80. To get to $130 price per share, we would have to get $1.25B in operating income, which at an 18% operating margin puts revenue at $7B, which seems generally unlikely.
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). 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: 9.6%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Cap Rate for TSLA: 2.6%
Available Cash Flow
Divided by Cap Rate
Multiply by 20167PV 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
Divide equity value by shares outstanding:
As we can see, $100 is a very aggressive model, and while we like this company, we believe investors need to understand what they are getting into if buying today.