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Analysts Debate: Is Tesla Motors a Top Stock?

Wednesday - 3/20/2013, 9:23pm  ET

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Tesla Motors , the leading electric vehicle maker.

Tesla Motors by the numbers
Here's a quick snapshot of the company's most important numbers:

Statistic

Result (TTM or Most Recent Available)

Market Cap

$4.5 billion

Forward P/E

30.1

Revenue

$413.3 million

Gross margin

7.3%

Net income

($396.2 million)

Cash

$201.9 million

Long-term debt

$452.3 million

Vehicles

Model S: 20,000 annual production rate, 15,000 reservations

Model X: Scheduled for delivery in early 2014

Key competitors

Ford

General Motors

Honda

Nissan

BMW

Sources: Yahoo! Finance and company earnings release.

Travis' take
Historically, auto companies have been a terrible investment. General Motors went bankrupt a few years ago, so did Chrysler, and even Ford hasn't outperformed the S&P 500 long term.

F Total Return Price Chart

Source: F Total Return Price data by YCharts.

When you're in a capital-intensive business with union workers it's hard to alter your cost structure when the economy falters or consumer tendencies change. So, I come into any auto debate with a skeptical eye.

What Tesla brings vs. its larger competitors is a whole new look at the auto world. The company is building nothing but electric vehicles, it doesn't have legacy costs to worry about, and it's building its own dealer network. It's also making no qualms about going after the high-end consumer. Instead of trying to build an electric vehicle for the masses, like GM, Honda, and Nissan did, it went after affluent consumers who wanted an electric vehicle with all the perks of a BMW. This year's Motor Trend Car of the Year award validated all of those efforts.

On the financial side, Tesla is seeing some major progress. Revenue for the fourth quarter jumped 500% from the third quarter as production ramped up. Production run rate hit 20,000 annually by the end of the year and the result is an expected profit in the first quarter of this year and will be near breakeven on operational cash flow.  

The future is even brighter given the company's pipeline. Toyota is buying powertrains for the RAV4 EV and the company is progressing on its Mercedes-Benz B-Class EV program. The Model X, a crossover vehicle, will begin production in late 2013, bringing more scale to Tesla's manufacturing. If sales go as well for the Model X as they did for Model S, it could be very profitable next year.

Projecting Tesla's profits involves a lot of guesswork, but if we assume 40,000 units annually at an average price of $60,000 and the 25% gross margin, Tesla could make a $600 million gross profit by 2014. That's not bad for a company so early in its development and it makes me cringe a little less at the $4.5 billion price tag on the stock.

Visionary companies don't come along often but Tesla has the makings of one. I'll take a chance on this stock and give an outperform call.

Sean's take
I'll hand it to Elon Musk for definitely giving consumers something to talk about. The man is without question a visionary who's comparable to few others. But as an investment, buying Tesla Motors is about as appetizing to me as eating dirt. I have quite a few concerns about the longevity of the business that will definitely keep me on the other side of this trade from Travis.

To begin with, Tesla claims to have 20,000 Model S sedans sold for 2013. That's a fine figure, but doesn't it seem a bit disconcerting, then, that it was supposed to deliver 2,500 Model S sedans in its most recent quarter yet it fell 100 short? That's particularly worrying given that it expects to ramp up to 4,500 deliveries in the first quarter. This speaks to the very thing that got Tesla's Model S in trouble with consumers and investors in the first place: delays, delays, delays. Tesla won't speak of any delays now, but the numbers clearly aren't adding up to the expectations as per the norm. As icing on the cake, its Model X was originally scheduled to begin production in late 2013. That's now been moved back to late 2014... surprise! 

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