Tesla (NASDAQ:TSLA) reported slightly better than expected Q2 2014 operating results, however, I think the single most interesting piece of information that the company provided on the earnings call was their thoughts on production next year. Specifically, the company spoke of the end of 2015 production run rate of 100,000 cars. The purpose of this article is to roughly estimate revenue and EPS for 2016 and 2017 in light of the new information learned on the earnings call. Before delving into projections, let's first briefly review the 2nd quarter.
Tesla reported slightly better than expected Q2 2014 Non-GAAP EPS of $0.11 per share, versus consensus of about $0.04. The company delivered 7,579 vehicles in the quarter exceeding guidance of 7,500, and manufactured 8,763 vehicles also exceeding guidance of 8,500. Delivery guidance for the year was maintained at over 35,000, despite the fact that the delivery guidance for Q3 2014 was 7,800, lower than expected. The lower Q3 2014 guidance was driven by a two week manufacturing stoppage related to retooling of the factory.
Non-GAAP Gross margin came in at 26.8% a 140bp sequential improvement, which represents a solid continuation of gross margin expansion together with the growth of the volume base of Model S. The company continues guide for 28% gross margin by Q4 2014.
Estimating 2016 and 2017 EPS
Putting together the above operating performance, guidance for the year, and most importantly the production run rate that the company could achieve at the end of 2015, a rough EPS range can be estimated for 2016, and also to a certain degree 2017.
The EPS projections for 2016 are built assuming at least 100,000 vehicles are produced and delivered, the average price per vehicle consistent with what has historically been observed, slight gross margin expansion from 28% at the end of 2014, rapidly growing operating expenses, and several other assumptions. Exhibit 1 shows estimated operating performance and EPS for 2016.
Exhibit 1 - EPS Estimates for 2016
Source: Analysis by the author
Based on the analysis above, Tesla may earn $5.76 to $8.00 per share in 2016. I think the assumptions underlying the EPS estimates are realistic for several reasons. First, 100,000 unit production is not aggressive because it assumes no growth in 2016 from the end of 2015 production run rate level. Second, assuming no meaningful macro slow down, it appears realistic that the company could sell whatever it produces given this has been, and continues to be the case up to now. Third, 28% gross margin in Scenario A is actually same as the company guided 2014 gross margin exit rate, despite having about twice the production volume in 2016 versus end of 2014 run rate. Finally, costs are assumed to grow aggressively by little under 40% and 50% from Q2 2014 annualized run rate levels for R&D and SG&A, respectively.
In addition to 2016, based on some of the information provided during the Q2 2014 earnings conference call, it is also possible to take a shot at estimating 2017 EPS range. Specifically, a question was asked during the conference call on how many vehicles could the company produce assuming battery capacity dynamic without the giga-factory. The management responded that 150,000 vehicles could be produced. This then allows us to develop a possible operating picture for 2017, assuming the company manages 150,000 vehicle production and sales. Note, that this is not management guidance nor did they mention that the production rate in 2017 could be 150,000. I am making an assumption that if there is battery capacity available for 150,000 cars without giga-factory, the company manages to grow production to that level from its discussed 100,000 run rate at the end of 2015. Exhibit 2 shows rough EPS build for 2017.
Exhibit 2 - EPS Estimates for 2017
Source: Analysis by the author
Based on the analysis above, Tesla may earn $11.57 to $14.82 per share in 2017. Clearly, the key assumption here is whether there is available battery capacity to make 150,000 vehicles without the giga-factory, and whether the company can boost production and sales to that level in 2017. Other assumptions appear much easier to envision from current standpoint, though of course it is difficult to say what will be happening in 2017.
In conclusion, analysis presented in this article shows that Tesla could potentially earn $5.76 to $8.00 per share in 2016, and between $11.57 and $14.82 per share in 2017. Furthermore, should the EPS figures discussed in this article be achieved, than Tesla valuation appears rather reasonable from a multiples standpoint. For example, at $250 per share, the stock would be trading at about 36x and 19x 2016E and 2017E midpoint EPS estimate ranges. Importantly, the EPS estimates discussed here do not include giga-factory driven volume growth.
Disclosure: The author is long TSLA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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