Seeking Alpha
, OakBytes.com (38 clicks)
Research analyst, growth, large-cap, long-term horizon
Profile| Send Message|
( followers)  

Summary

  • Nissan's collaboration with Tesla will benefit both companies.
  • Nissan has largely completed its upfront large scale investments.
  • Despite the improvement in sales the company is still trading at a discount.

Nissan Motor (OTCPK:NSANY), Japan's second largest car maker, is engaged in the manufacturing and sale of automotive products and marine equipment in Japan and internationally. The company is the biggest player in the market when it comes to electric vehicles and is planning to expand its sales volumes further by entering a deal with Tesla Motors (NASDAQ:TSLA). Moreover, the company is also planning to establish a joint venture with the German luxurious brand-Daimler (OTCPK:DDAIF).

The company's ambitious expansion plans caused problems in the past on both the manufacturing and sales front, but the Japanese car maker is coming out of that phase and sales are starting to improve. The company has largely completed its large-scale upfront investments and now is the time to recoup its investments. The company is also aggressively expanding its dealer network in China and new SUVs are expected to make a full contribution to earnings.

Collaboration with Tesla and BMW on Charging Technology

Soon after Elon Musk announced that Tesla is opening up all of its existing and future patents to everyone on a fair usage policy, Tesla entered into negotiations with Nissan and BMW (OTCPK:BAMXY). Both Nissan and BMW are keen to collaborate with Tesla on the charging technology. Nissan is considering partnering with Tesla in order to establish a stronger place in clean transportation. The all-electric Leaf by Nissan already holds approx. 50% of the world's entire market for electric vehicles and if collaboration between the three rivals occurs, then they would together account for about 80% of the world's battery-powered electric car sales.

The negotiations between the three companies for an electric charging network are still in early stages. The company may aim to utilize this opportunity by using Tesla's supercharger technology in order to make future electric cars more efficient and appealing to consumers who have an interest in electric vehicles but not enough time to devote to charging these vehicles on a regular basis.

Tesla's Smart Move

Tesla's decision to open its patent is not only about altruism but is also a result of hardcore strategic thinking i.e., a step to rapidly expand and monetize the electric vehicle market. While Tesla's decision to open up its patents can reduce the costs of making electric cars for other makers, Tesla will itself enjoy cost reductions as the infrastructure costs like power plants would spread among more suppliers. According to IHS, a leading provider of diverse global market and economic information, the demand for electric vehicles would increase by around 67% during 2014. Despite the huge double-digit increase, the worldwide installed base of 1.1 million electric vehicles remains a small sum against the yearly automobile production of approx. 100 million vehicles.

The electric car market is still in its infancy as electric vehicles sold last year numbered only 96000, representing only 0.5% of the total market share of the automotive landscape producing 16.5 million vehicles. Although, Tesla is the biggest U.S. electric car maker, Model S because of its price currently caters only to a niche market and for the company to produce electric cars that an ordinary American can afford, Tesla will have to team up with a company or companies with enough resources to realize that dream.

Currently all the innovation in the electric car segment is being sponsored by the government subsidies and incentives. By opening the patents, the product would become more general and therefore less costly and hence more suppliers would enter the market to fulfill the increasing demand, as the costs to the ultimate consumer decreases. As I mentioned earlier, Tesla has already entered into negotiations with Nissan and BMW and any collaboration will distribute the costs of creation of universal charging facilities among the three suppliers of the electric vehicles.

Joint Venture With Daimler

Nissan also plans to establish a joint venture with the German luxurious brand-Daimler. According to the joint venture, Daimler will build a Mercedes production plant in Mexico at a facility operated by the partner, Nissan. The Mexican joint venture is designed by the companies to produce future vehicle models for their Infiniti (Nissan) and Mercedes-Benz (Daimler) brands.

In the outline deal, Nissan would build the next generation Mercedes GLA offroader and all new Infiniti cars at its Aguascalientes plant northeast of Guadalajara. The production of the Infiniti model will get underway as soon as 2017, with the Mercedes-Benz model to follow. The Mercedes-Benz model will be exported to the U.S. and other countries. The combined output as a result of the agreement will likely be 100,000-150,000 units per year.

After A Long Period of Decline, Sales are Finally Growing

The Japanese company reported sales jumped 19% in May, beating the analyst consensus estimates of an 11% increase. The company's retail sales rose by 274,000 units year-over-year, driven by a gain of 10% (72,000 units to 719,000 units) vehicles from Japan, 11.4% (147,000 units to 1.285 million units) vehicle growth from America , and a 6.6% (84,000 to 1.266 million units) share coming from China.

The company's sales volumes were driven primarily by the successful launch of its new car models and from growing market structure. Moreover, the company projects its global sales volume to grow by 8.9% to 5.65 million units and plans to launch 10 new models in 2015, including the new Murano, Datsun, on-Do and the e-NV200.

Japan's second biggest automaker's profit increased 4.8% to ¥114.9 billion ($1.12 billion) in the first quarter of the year. Moreover, the profits were up 14% for the whole year. Despite the increased spending on sales and product quality, margins of the company rose year-over-year. The depreciating yen, lower purchasing costs, and an improved volume mix all contributed to growth in profits. Going forward, the company expects its operating profit to increase by 7.4% to ¥535 billion year-over-year in 2015.

Nissan Is Cheap

Despite the improving economy, Nissan shares remained sluggish over the past year because of the low profitability and overly ambitious expansion targets set by the company, which caused problems on both the manufacturing and sales front. At the same time shares of peers, General Motors (NYSE:GM) and Ford (NYSE:F) registered a strong relative performance in the last 12 months (as you can see from the chart below).

(click to enlarge)

Nissan is trading at a decent discount to both, its underlying strength and industry as a whole. The company has price/earnings of 10.5 compared to 18.3 of the S&P 500 and 21.0 of peer, GM. It has a price/book ratio of 0.9 compared to 1.5 of GM and an industry average of 1.6. Finally, Nissan has a healthy dividend yield of 3.1% compared to 2.9% of Ford and 3.2% of GM.

Conclusion

Nissan's ambitious expansion plans caused problems for the company in the recent past but the company has largely completed its large-scale upfront investments and now it's time to recoup those investments. The company's volumes and margins are improving. The most recent results also showed signs of earnings improvement in North America, including a boost from the new Rogue and a peak in sales incentives per vehicle. The new Rogue remains in tight supply, but volumes are expected to increase, as Nissan will launch production in South Korea in the summer or thereabouts. Compared with the January to March period, when price competition was severe as a result of poor weather, sales incentives per vehicle in North America are also expected to improve.

Nissan is also entering into planned partnerships with Tesla and Daimler, to share the development and manufacturing costs and to increase its presence in the electric vehicles market. The company also plans to launch several new plants in Brazil, Indonesia, Thailand, Dalian etc., in 2015 along with the launch of 10 new car models during the year.

Finally, I think Nissan shares are still trading at a decent discount because of the manufacturing and cost issues the company has had in the past. However, the company is making efforts to curb these costs and these efforts are also yielding results.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Nissan Motor: Tesla's Friend Or Foe?