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Tesla Motors – Stock Drivers in 2014

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Headquartered in Palo Alto, California, Tesla Motors, Inc. (TSLA) is currently the largest automaker that deals solely in all-electric vehicles. It was founded in 2003 by billionaire CEO Elon Musk, who currently owns 23% of its outstanding shares.

Over time, Tesla has positioned itself as a major player in the battery electric vehicle (BEV) market, which looks set to witness a surge in demand. Global BEV sales have picked up, and an increasing number of large automakers will soon be introducing their own BEV models in the market.

Tesla stock posted tremendous returns last year, which was great for investors who believed in its all-electric vehicles and bought into the company in 2012. However, the naysayers have stuck to their guns, and short interest in Tesla is quite high right now – nearly 39% of the total float.

Bidness Etc has reviewed some of the more realistic expectations regarding the company that could drive its stock in 2014. Investors have their eyes glued to the news flow surrounding the company, but we will be focusing on some key metrics and upcoming events that are likely to move the stock.

Tesla Model S

It is expected that hybrids and BEVs, which now make up close to 4% of all vehicles sold in the US, will continue to become an increasingly important part of the auto industry in 2014. This bodes well for carmakers like Tesla, whose Model S electric vehicle was introduced at the end of 2012, and saw robust demand in 2013.

The Model S is an all-electric luxury sedan that focuses on the discerning upscale customer, and retails for around $70,000. It was the bestselling BEV in the US in 2013, surpassing both the Nissan Leaf and the Chevy Volt in terms of monthly sales. Demand for Tesla’s flagship car has been quite strong in recent quarters, and the company has repeatedly stated that the only constraints it faces are on the supply side.

Tesla has encountered a number of production issues, specifically in its battery technology and supply chain. The company is said to be producing around 600 vehicles a week currently, up from around 500 as of the end of the third quarter of fiscal 2013 (3QFY13). As of January 2014, its annualized production rate has climbed to over 30,000 units.

The electric car maker has said that it expects production and unit deliveries to double in 2014, because of which it is actively seeking to expand its factory to cater to the expected rise in demand for the Model S.

Production and Expansion

Tesla assembles its vehicles at a former Toyota factory in Fremont, California. It acquired the factory in 2010, the same year it filed for its initial public offering (IPO). It sources hundreds of auto parts from various manufactures from around the world, but its production process has yet to reach optimal efficiency.

The company currently produces its batteries under a partnership agreement with Panasonic, but is reportedly planning to build the world’s largest Lithium-Ion battery plant to take control of the production of this crucial component. Details regarding the new facility are expected to be released with its next quarterly earnings announcement.

In its latest earnings announcement, made November 7, Tesla said it earned revenues of $602 million on unit sales of 5,500. Analysts had been expecting sales of 5,600 cars. Even though earnings and revenues both beat estimates, the disappointment over lower sales sparked a sell-off that led to a 10% drop in Tesla’s stock price the following day.

The stock fell further after multiple reports of battery fires in Tesla cars. The fires are still being investigated by the National Highway Transport Safety Administration (NHTSA); nonetheless, it reaffirmed its 5-Star safety rating for the Model S last month.

In December, the company said that it was investing $415 million in its Fremont factory and adding close to 2,000 new jobs to bump up production. Tesla has also been seeking manufacturing locations abroad to build a new factory that will cater to international markets, which could push annual unit sales up to 50,000 in FY14.

Unit Sales

On January 14, Tesla Motors rallied almost 16% on news that the company had recorded better-than-expected unit sales in 4QFY13, which ended December 31. Though the earnings results for 4QFY13 are due on February 17, Tesla revealed beforehand that unit sales in the quarter touched 6,900, exceeding expectations by almost 20%. The management also hinted that 4QFY13 revenues will likely beat forecasts by nearly 20%.

The announcement came as a surprise, since the company had missed sales expectations in the previous quarter. With the sales figures for the last quarter, total unit sales in FY13 equaled 22,450, above the company’s own expectations of 21,500 for the year.

Financials

Tesla reported its first quarterly profit (non-GAAP) in 1QFY13, and expects FY13 to be its first full profitable year. Analysts polled by Bloomberg agree, and expect Tesla to report its first adjusted earnings for the 4QFY13 period.

Gross margins expanded significantly in 2013, and are now at a level where the company will want to maintain growth momentum going into 2014.

The company does not seem to be in a risky position as far as debt repayments are concerned: its total debt at the end of 3QFY13 stood at merely $600 million.

While Tesla’s revenues from Zero Emission Vehicle (ZEV) credits have declined from around $80 million in the second quarter to $20 million in the third, the company is expected to offset the loss with the increasing revenues from car sales. Tesla also receives tax benefits as it produces environmentally-friendly cars. It has so far received tax credits worth $612 million from the State of California.

The company’s capital expenditures (capex) are a different story, though. While the company has not provided capex estimates for 2014 and it cannot be said how much its expansion plans will cost, we feel the figure is likely to be in the billions. If such costs rise along with unexpected expenses (due to recalls and product delays, for example) we could see the company face a major cash shortfall.

Sell Side Expectations

Sell side analysts have varying opinions on Tesla Motors, with six analysts rating the stock as a buy, six rating it as a hold and three rating it as a sell. The consensus 12-month target price is $153.

Analysts polled by Bloomberg expect the company’s earnings to rise 158% in 2014, and revenues to jump 68% over the same period.

Adjusted earnings per share (EPS) is expected to be $0.19 for 4QFY13, and $0.63 a share for the full fiscal year. Estimates also suggest that Tesla will record revenues of $658 million for 4QFY13, and $2.38 billion for FY13, while average gross margins will expand to 25.86%, up from 23.5% in 3Q.

Deutsche Bank is one of the more bullish banks on the stock, and has given it a target price of $200. Robert W. Baird & Co. also upped its target price for the stock on January 9, and its target price is currently $187. On the other hand, low estimates go as far down as $68.

Upcoming Catalysts

Tesla’s Vice President of Sales, Jerome Guillen, spoke on January 14 at the North American International Auto Show held in Detroit. Aside from dropping hints on where sales were headed, he reported that the company was on track to introduce its anticipated Model X crossover in the second half of 2014. The Model X is a seven-seat luxury vehicle designed for families. The model was first displayed at last year’s Detroit Auto Show, and will likely go on sale for a price in line with the Model S’s.

Another new model is currently in an early stage of development. It is known as the Gen III or Model E, and will be priced at almost half of what a Model S costs. It will compete with entry-level vehicles offered by luxury carmakers like BMW (BAMXY) and Mercedes Benz, which is owned by Daimler AG (DDAIY). Most industry analysts expect the car to be on assembly lines in 2017, and become Tesla’s bestselling model.

Tesla has embarked on a unique strategy to sell its vehicles to consumers. It utilizes a direct retail model to market and distribute its vehicles around the world by developing its own Tesla-branded showrooms in major populated areas. The company says this is done to ensure the highest level of customer service and brand loyalty. Tesla currently has around 150 worldwide retail and service locations, and plans to expand with a focus on international markets.

This is because demand for Tesla’s cars has been very robust outside the US, especially in Europe and China. The company started selling its cars in Scandinavia at the end of last year, and started taking orders in Hong Kong, where demand was strong. The company recently opened its first retail location in China, where demand from high net worth individuals is expected to be high. Tesla is also building an extensive supercharger network in Germany as it expands in Europe.

Investment Risks

Tesla shares are currently valued at a one-year forward price-to-earnings multiple of 94.2x. The high multiple is largely attributable to expectations that the company will soon emerge as a major player in the global auto industry. However, the company still has a long way to go before investors can justify the current valuation – most importantly, a number of issues in its supply chain and batteries have yet to be addressed.

A Tesla battery costs around $15,000, and the technology integrated into it has not been optimized yet. Producing these batteries on a larger scale will require considerable investment. Tesla is also facing problems in its directly-owned retail model, with a number of dealerships in various states, including Ohio and New Jersey, crying foul and calling for the stores to be shut down.

Meanwhile, other automakers are closing in on its lead in the luxury electric vehicle market, and any delays in the expansion of production or issues with the rollout of the new Model X will likely drive the stock price down.

Product recalls have affected the company in the past, especially as seen in a recent recall of around 29,000 home charging units. A full-scale recall could lead to more problems.

Stock Price Performance

Tesla Motors stock surged almost 375% in 2013 on the back of favorable reviews of the Model S, and expectations that the company will report a healthy performance for the full year. However, short interest in the stock has remained high at 39.8%, with the short ratio currently around 4.1 days – meaning it will take a little over four days for short sellers to cover their positions in the stock based on current trading volumes.

The stock has been very volatile in the past six months. Shares have moved largely on news flows, quarterly earnings results and full-year guidance. Tesla’s stock price fell to around $120 in October from highs of $193. The stock was back up to $160 on January 16, 2014.

Conclusion

Bidness Etc recommends investors proceed with caution on the stock, know the investment risk and be aware that it is trading at very high multiples. While we are personally optimistic about the company, it goes without saying that the stock is as volatile as the company is groundbreaking.

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