Tesla: Don't Overpay For The Stock. Buy What's Under The Hood Instead

by: John Morgan


Tesla stock is a high-risk buy at current levels.

Other stocks in the EV industry may represent better value.

Some suppliers to Tesla and investors in Tesla may also present attractive prospects.

Investors who missed the launch into outer space of Tesla Motors' (NASDAQ:TSLA) stock have two choices: they can wait for the shares to re-enter the earth's atmosphere, or they can look under the hood of the automaker to capture related ideas with lingering value.

Tesla, the brainchild of inventor Elon Musk, is trading at about 150 times forward earnings - about as ethereal as you can get and still be a mortal company - on enthusiasm for its stylish electric vehicles, aka EVs, and its ambitious plan to build a huge "gigafactory" for EV batteries. That is more than pricey.

However, some of the companies that contribute to the latest in EV technology are solidly profitable (unlike Tesla, at least yet), and are poised to benefit from the growing popularity with consumers of electric vehicles of all types.

Three promising companies making inroads into energy storage and battery technology are Arotech (NASDAQ:ARTX), Polypore (NYSE:PPO) and Maxwell (NASDAQ:MXWL).

Of the three, Arotech may offer the most value -- the lowest trailing P/E at 30.71, the lowest price-to-book at 2.15 and the greatest EPS growth on a TTM basis of 171%. Arotech makes batteries and charging systems primarily for the military.

EVs require lithium-ion batteries, and large suppliers of lithium are FMC Corp. (NYSE:FMC), Chemical & Mining Co. of Chile (NYSE:SQM) and Rockwood (NYSE:ROC).

However, FMC and Chemical & Mining are not pure plays for lithium - they mine much more of other minerals. By contrast, Rockwood, a U.S. firm, has invested heavily to gain access to the world's largest lithium reserves. Rockwood has recorded EPS on a TTM basis of $0.72 per share on revenues of $1.38 billion, a price-to-book ratio of 2.93 and institutional sponsorship of 95%.

Another critical component in lithium-ion batteries is graphite. In fact, more graphite than lithium is required to make the batteries, and the world's largest producer is China.

Three publicly traded graphite producers are Entegris (NASDAQ:ENTG), Advanced Metallurgical Group (OTCPK:AMVMF) and Graftech (GTI). Of the three, Entergris has the most solid fundamentals, with a trailing P/E of 22.44, price-to-book of 2.32, operating margin of 13.05 and ROE of 10.24.

One backdoor way to get some direct exposure to Tesla would be to invest in Panasonic (OTCPK:PCRFY), Daimler (OTCPK:DDAIF) or Toyota (NYSE:TM). All three companies are invested in Tesla.

In addition, Panasonic is expected to partner in the gigafactory with Tesla, so the Japanese firm will eventually post both operating results and investment results affected by Tesla's success, but presumably without Tesla's extreme valuations. With a recent price of $12.63 for its ADRs, Panasonic reported EPS growth on a TTM basis of 112% and trailing P/E of 19.43 -- an attractive stock in its own right.

In return for their investments, the automakers Daimler and Toyota will also share in Tesla's EV technology, as they are customers of the company as well. Of the two, analysts are currently more enthusiastic about Daimler because of its stronger revenue growth of 7.87% on a TTM basis vs. an actual revenue decline for Toyota.

Tesla is currently thwarted at some level by its ambition and its success, as popular demand for the company's vehicles is overwhelming its production capabilities. As Tesla ramps up its production and the gigafactory starts churning out batteries, the bottlenecks should diminish.

Some well-priced and promising direct suppliers for Tesla vehicles to consider are: Nvidia (NASDAQ:NVDA), which makes Tesla instrument displays; OmniVision (NASDAQ:OVTI), which makes image sensors for Tesla's rear-view camera system; Cypress Semiconductor (NASDAQ:CY), maker of touchscreen components for the Tesla infotainment system; and Garmin (NASDAQ:GRMN), which contributes to the Tesla navigation system.

The future of EVs may be bright. The federal government is spending $2.4 billion in grants to encourage the technology and its adoption. The popularity of electric cars has also been kick-started by Tesla, which has made the formerly clunky-looking vehicles much more sporty and less politically correct.

The Department of Energy estimated 1.2 million EVs will have been put on U.S. roads from 2011 through 2015, but figures from the Electric Drive Transportation Association, an industry trade group, reveal the DOE figure may be a bit optimistic.

Tesla expects to be building around 500,000 electric cars annually by 2020. If the visionary company is correct, it should create ample investment opportunities for a full range of companies in the EV industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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