Friday, May 10, 2013

Tesla Motors ( Nasdaq - TSLA ) -- Turns the Corner

Tesla Motors (TSLA $77.00) reported excellent better than expected Q1 results.  The electric car manufacturer sold 4,900 luxury Model S sedans in the period, driving revenues up 18.6x to $561.8 million.  All of those were delivered to U.S. customers.  About 100 cars ended the quarter in inventory.  Fully taxed earnings came in at $.08 a share.  Production costs were elevated in the period as Tesla scrambled to meet demand.  More efficient operations are expected in upcoming periods, which should help margins.  Federal tax benefits bolstered performance.  Those subsidies are expected to decline in the next two periods and disappear altogether in the December quarter.  In spite of that manufacturing margins are predicted to rise materially and plateau at around 25% in the final quarter.  Overall margins will depend on how much Tesla spends on product development, marketing, and service.  Those investments probably will stay high to lay the groundwork for additional growth beyond.  A solid profit performance appears attainable, nonetheless.  We estimate fully taxed earnings will finish the year around $.50 a share.

Unit volume growth will exceed revenue gains in 2014.  Tesla plans to introduce a leasing program to broaden its potential market.  The company will collect 100% of the sales price from its financing partners.  But from an accounting standpoint revenue will reflect the underlying lease payments, spreading results out over a three year period.  Tesla is guaranteeing the re-sale value of its cars after three years.  That conditional adjustment requires to use of the lease accounting treatment.  Volume should benefit as well from the beginning of international sales.  Most of that will occur initially in Europe where gasoline prices are unusually high, making electric power even more attractive than in the U.S.  Sales to Asia may begin, too.

Sales of power trains and battery packs to Toyota and Mercedes offer additional leverage.  Toyota is building an all electric RAV; Mercedes, a B-Class sedan.  Both rely on Tesla's underlying technology.  Tesla's own next generation vehicle, the crossover Model X, remains in an early stage of development.  Final  design is slated for mid 2013.  Deliveries could start in late 2014.  The Model X is expected to sell for approximately two thirds of the $90,000 charged for the Model S sedan now in production.  That will be a high risk, high return product line.  Today's luxury model is being purchased mainly by extremely affluent customers who typically have other cars they can use in case they need to travel significant distances, or just need to travel period if the power goes out.  The next group will consist more of everyday users.

Electric car technology remains a question mark.  E-vehicles are likely to carve out a variety of niche markets where range isn't a limiting factor.  Tesla is trying to expand its cars' driving potential.  But the upside to that is limited by the company's use of lithium batteries.  Mechanical and software engineering tricks may boost performance somewhat.  But it is unlikely lithium ever will re-charge quickly or materially extend driving range.  New battery technologies aren't showing much potential these days.  So a competitive leapfrog is unlikely.  Without major improvements, though, electric cars will have a hard time overtaking gasoline, diesel, and natural gas to become mainstream vehicles.  Tesla is a great company and is well positioned to thrive in the electric car segment.  Whether it break out from there remains to be seen.

( Click on Table to Enlarge )

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