Author: Eric Steiman
Covestor model: Undervalued Opportunities
Disclosure: Long TSLA
Tesla Motors’ (TSLA) financial success hinges on the next few months of Model S production. The model S is a luxury sedan priced to compete with Mercedes, BMW, and Audi. The car is a fully electric vehicle with battery ranges of 160 miles, 240 miles and 300 miles per charge.
The car has added storage in the trunk and even an open space under the front hood that the company has nicknamed a “frunk.” The vehicle comes equipped with an iPad-like screen that is used for radio, internet, gps, and other everyday car functions.
The prices range from over $100,000 for the top performance variation to $60,000 for the lesser battery pack (before a $7,500 government incentive). At the end of the fourth quarter, the company had over 8,000 cars reserved that required a deposit of $40,000 for the top performance vehicle, and $5,000 for the other Model S vehicles.
The company plans on building these vehicles in its Freemont, California plant that was acquired for $50 million from Toyota (TM) in 2010. The plant had been used as a partnership between General Motors (GM) and Toyota before shutting its doors. Today, it’s a steal for Tesla and its hopes to become a nationally recognized car manufacturer.
To date, Tesla has never produced a vehicle under its own power. This will be its first and probably only shot at success. Many believe that the company will hit road blocks in its production schedule, which is a reason that over 20 million shares are being sold short (a bet that could back-fire severely if the company produces).
The company has forecasted that beginning in July 2012 through year end that it planned to sell 5,000 vehicles, with 2013 vehicle sales at 20,000.
CEO Elon Musk has had great successes in the past and looks to continue that trend with Tesla. Musk was a co-founder of Paypal and through that sale became an instant multi-millionaire.
Today, he has a net worth over $1 billion dollars through his shares in Tesla (he owns over 30%), SpaceX (which he is CEO), and Solar City (where he owns a large position). Musk is a great salesman and entrepreneur who has been adamant about selling the first vehicle in July 2012. Can his company come through?
In March 2012, the company asked its first 40 reservation holders to submit their final configurations, with an expected delivery date of July 15th. Since that date, an additional 140 reservation holders have been asked for their configurations and it seems that this number should increase as the expected delivery date approaches.
As of today, Tesla Motors has never had a positive quarter of earnings and doesn’t expect 2012 to be positive either. Musk has stated that 2013 should be the first year of Tesla Profits.
After reading and closely following the company its seems that they are on pace to slowly ramp production beginning this summer, and have mentioned that the Model S will achieve greater than 25% profit margins.
If these expectations are met, the company’s stock price should react positively. During last quarter’s conference call the company estimated revenues for 2012 at $550-$600 million, which is double what they reported in 2011.
The reason I am bullish on the stock is that Tesla is innovating within a dormant automobile industry. I believe that the Tesla product is a game changer in a slow moving US car manufacturing business. The top luxury brands in the world all import their vehicles from around the globe.
Tesla has entered the market a time when a change in production and zero emission vehicles are needed. This cutting edge technology has also been adopted by Toyota and Daimler (DDAIF), who have entered into agreements with Tesla to supply battery packs for future Electric vehicles.
It’s a time for change and Tesla is at the forefront of this revolution. If 2012 production of the Model S goes as planned, the company has already introduced its next vehicle, the Model X, for sale in early 2014. The company has a plan in place, now it’s time to hit their marks and the stock should react favorably over the next few months.
Clearbrook Capital Advisors LLC is a registered investment advisor based in Massachusetts. The firm seeks to employ an investment strategy that balances bottom-up stock selection with an evaluation of general market conditions. Eric Steiman is the founder and the Managing Member of Clearbrook.
Clearbrook believes in balancing the fundamentals of bottom-up investing against the backdrop of stock market cycles. Clearbrook applies methods of technical analysis in its security selection and market analysis. Generally, the firm seeks investment in companies whose securities it believes are undervalued by the market and can be acquired at a discount to its estimate of intrinsic value. Additionally, Clearbrook will engage in short selling opportunities if it feels certain securities or the market as a whole may be set to decline.