Seeking Alpha
Long/short equity, deep value, value, special situations
Profile| Send Message|
( followers)  

Despite the fact that Ford Motor Company (F) suffered through a tough Q2 2012 performance in Q2 2012 due to the weakness in the European market, a slowdown in the Latin American market and increased marketing in Asia, it is still our preferred pick in the automotive industry. We like the fact that it undertook its restructuring earlier than its rivals and was able to decline a bailout from the Obama Administration. Despite the fact that it turned down welfare for the well-connected, it was the first of the Big Three Automakers to return to profitability, it was the first Big Three automaker to regain an investment-grade credit rating from the Big Three Credit Rating agencies and the first Big Three Automaker to reinstitute its dividend. Even though it faced a tough macroeconomic environment that pushed its Q2 2012 profits down by 57%, it still generated $1.04B in net income. In short, at least Ford Motor Company is Profitable and has begun paying down its Department of Energy Electric Car Development Loans and that's more than what we can say about Tesla Motors (TSLA).

Government Aid

Tesla Motors was incorporated in 2003 in order to commercialize the T-Zero prototype electric sports car created by AC Propulsion. It introduced its first vehicle, the Tesla Roadster in 2008. The Roadster had a base sticker price of $109K and qualified for a number of taxpayer-funded incentives to those who bought one. Even with the $7,500 in tax credits, the base price on the Tesla Roadster is still $101.5K. For that price, we could buy four high-quality 2013 Ford Mustangs at $22,200 each and still have nearly $13K in cash back to pay sales tax, registration and even some options. In addition to the government paying people $7,500 to buy an electric vehicle, the Department of Energy gave it a $465M low-interest loan package. The company received its loan facility in 2010 and has already drawn down all but $33.2M as of Q2 2012. We believe that the company will more likely that not pay back its loan and the taxpayers will be on the hook. We think it is ironic that President Obama rails against millionaires and billionaires not paying their fair share and yet Tesla's co-founder Elon Musk is a foreign-born billionaire corporate executive and Obama donor who sought $465M of the taxpayers' hard earned money to fund Tesla's electric vehicles, which we think are white elephants on wheels.

Source: and Green Car Reports

Ford Motor Company had put the entire company in hock in order to obtain a $23.5B loan in 2006. Because it had raised the necessary funds to turn itself around, it did not need to beseech the taxpayers for money, unlike GM and Chrysler. We were disappointed to see that Ford had received a loan from the Department of Energy in 2009 but we can see that the company has begun repaying it this quarter and will make its final payment in 2022. We are hoping that Ford was coaxed into taking the loans so as eliminate the stigma of the auto bailouts to GM and Chrysler. We won't condone Ford's participation in this program but at least we can see that Ford has a high likelihood of paying it back, unlike Tesla. Ford also accrued $1.2B in income tax expenses during the first half of 2012 while Tesla has not even paid $1M.

Sources: Ford's Q2 2012 10-Q and Tesla's SEC Filings

H1 2012 Results

Ford earned $2.44B in profits during H1 2012, which was down from $4.96B in H1 2011. In its first quarter, Ford North America's solid performance was not enough to offset profit declines in South America, losses in Europe and marketing investment expense increases in Asia. We were content to see the company generate over $1B in net income each quarter though and its net automotive cash position was $9.5B as of H1 2012, versus $8B in H1 2011.

Tesla Motors: Despite the hype surrounding the Tesla Roadster and the Tesla Model S, the company has seen its H1 2012 revenues collapse by 47% versus 2011 levels. But the real concern for us isn't merely that the company's revenue has seen such a significant decline. To us, the real concern is that the company boosted its operating expenses by 47% during this time period. This helped the company rack up a $195.5M loss and burn through $240M worth of cash in H1 2012 even though it was able to increase its reservation payment deposits by nearly $42M. This compares unfavorably with the $2.44B that Ford earned but at least both companies saw profits decline by 50%-100% in H1 2012 versus H1 2011.

Sources: Ford's Q2 2012 10-Q and Tesla's Q2 2012 10-Q

Debt Capital

Both Ford and Tesla have a significant level of debt relative to assets in that both firms have a 55% debt to assets ratio. However, there is a huge difference in the composition of the debt between the two companies. Nearly all of Tesla's debt has been financed by the Department of Energy's Electric Car Loan Program. Only 5.8% of Ford's total debt financing ($5.8B out of $100B) was due to the DoE Loan Program and we still expressed our disappointment in Ford signing up for the program. The DoE Loan Program represents 41% of Ford's gross Automotive Sector debt and Ford has a net Automotive Sector cash position of $9.5B as well as $11.8B in cash at Ford Motor Credit. Gross debt at Ford Motor Credit represents 86% of Ford's total gross debt and it is offset by loan and lease receivables. Asset-backed debt represents nearly half of Ford Motor Credit's debt. In short, we can see that Ford has a stronger credit profile than Tesla Motors. Since Tesla Motors' debt is primarily funded by the taxpayers, we can see why Tesla does not even have a credit rating. While we are not happy with Ford drawing DoE Loans, we can see that Ford is paying those loans back and that Ford has earned the restoration of its investment grade rating.
Sources: Ford's Q2 2012 10-Q and Tesla's Q2 2012 10-Q

Equity Capital

We can see that both companies have equity/assets ratios of under 10%. We can see that both companies have over 100% of the firm's equity base from paid in capital rather than retained earnings and other comprehensive gains and losses. Both firms have accrued cumulative deficits with regards to the combined level of retained earnings and other comprehensive gains and losses throughout the cumulative histories of both firms. However, we give the edge to Ford here because we can see that it is generating profits and free cash flows which will be used to shore up the balance sheet and even to pay a nominal $.20/share dividend to Ford's patient shareholders. We also give the edge to Ford because its cumulative combined comprehensive income and retained earnings deficit only represents 17.65% of its total paid in capital versus 93.2% for Tesla and its equity/assets ratio of 9.4% exceeds Tesla's equity/assets ratio of 8%.

Sources: Ford's Q2 2012 10-Q and Tesla's Q2 2012 10-Q


In conclusion, we have never been fans of the automotive sector, due to the high level of capital intensity, the fierce competition between the automaker firms and the heavy regulation of the companies. However, we believe that even in this industry, there are always a few good eggs. While we don't think Ford is a perfect company according to our high standards, we can see that Ford is a good egg with regards to the automakers. Ford may have failed in surpassing the all-time high in net income that it achieved last year but we can see that it is profitable and is paying back its Department of Energy Electric Car Loans. Unfortunately, we cannot say the same thing about Tesla Motors. We can see that Tesla is channeling the spirit of the famous arsonist Francis the Flame Fraine with its cash burn. Fortunately for Tesla, the Department of Energy is willing to play the role of the MBTA pension fund and Steven Chu is playing the role of Jack Gallahue and it gave Tesla extra time to make a future payment, and will not have to pass a test this quarter that compares short-term assets with short-term liabilities. Based on the four factors identified in this report, if we were to pursue exposure to the automotive industry, we would go long Ford and we would short Tesla (either through an outright short sale, writing a call or buying a put).

Source: Ford Motor Company: At Least It's Profitable, Unlike Tesla

Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.