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Tesla Would Have No Place in Buffett’s Portfolio

Sunday - 4/21/2013, 10:22pm  ET

Tesla  is a company that generated much hoopla when it debuted because of the niche product it was offering. It created even more buzz when it went public; so much so that its price the day of the IPO was above its target price. 

If you are considering investing in Tesla, but you have doubts, consider one of the most trusted methods investors use in determining worthy investments. This method is commonly called the “Warren Buffett Way.” Apply the principals of this method and ask yourself, would Tesla be included as a Berkshire Hathaway position?

Before going into the principles of the Warren Buffett Way, let’s review Tesla. Founded by Elon Musk in 2003, the company’s niche is building high-end autos that are powered by electricity. You may recall the first electric cars to enter the market; they were nothing to be excited about as far as being aesthetically pleasing to the eye. The length of time you could drive the car without charging it also left more to be desired.

Musk, who is the chairman and CEO of Tesla, sought to change the image of electric vehicles, and to his credit, he did just that. Under his watch, Tesla’s models include the Roadster, the Model S sedan and the Model X SUV. Automobile Magazine named the Model S its "Car of the Year," citing its design and impressive speed.

Return on investment

With that being said, let’s look at how Tesla stacks up when it comes to one of the principles of the Warren Buffett Way – return on investment. The theory is based on how much of a return there is on invested capital. In Tesla’s case, this needs improvement; it is -72.22%. Remember, this indicator measures the strength and historic growth of a company's return on invested capital. TheStreet Ratings recently ranked Tesla at the bottom of companies it reviews for income generated per dollar of capital.

EPS

Also part of the Buffett Way’s valuation of a stock is the company’s earnings per share. Tesla’s earnings for the fourth quarter missed estimates, which amounted to a loss of about $75 million. A bright spot were sales, which totaled about $306 million.

Tesla execs at that time tried to mitigate the dismal earnings results by saying that the company expected to turn a profit during the first quarter ended March 31. Making a profit would be huge for Tesla considering it’s never done so. Its full year losses climbed to $396 million last year from $254 million in 2011.

Tesla’s next earnings release is slated for May, and it will cover the first quarter ending March 2013. The market will be looking to see if Tesla will be able to reverse its trend of declining earning per share, which has plagued it for the past two years. Consensus estimates suggest that this will happen. According to Zacks Investment Research, based on four analysts' forecasts, the consensus EPS forecast for the quarter is $-0.17. The reported EPS for the same quarter last year was $-0.86.

Niche versus the giants

A challenge that Tesla faces is being able to compete in a space that is becoming increasingly more competitive. As mentioned above, consumers’ palate for electric vehicles has been slow to develop. Determined to change that, well-known automakers, such as General Motors , Nissan (NASDAQOTH: NSANY), Ford  and Toyota , have all entered the space. GM and Nissan hit the ground running with their electric vehicles in 2011, with their Chevy Volt and Nissan Leaf. Toyota is making its presence known with the Prius, and it reportedly has plans for an all-electric RAV4 mini in the works. Their sales have not been particularly strong. Ford’s EV model is the Electric.

According to Trefis, the electric vehicle market makes up around 1.9% of the total passenger car market. By 2020 that could grow to 10%. So that’s clearly not a huge market to sell to, which increases the chances that Tesla has its work cut out for it to improve its fundamentals and be a viable long-term investment.

The shorts

Also consider this: one of the gauges that can be used to get an idea of investor sentiment is the percentage of those shorting the stock. In Tesla’s case, that percentage was 44.51% at the time of writing, meaning that investors are betting against the long-term success of the company. Since the IPO, the company has kept a high ranking of being one of the most shorted stocks on the NASDAQ.

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