Friday, January 17, 2014

Tesla Motors (Nasdaq - TSLA) -- Stock Price Jumps After Guidance Revision

Tesla Motors (Nasdaq - TSLA) shares hopped 15.7% on Tuesday after the company revised its guidance for Q4 2014. The price was up to $161.27 in after hours trading. It had closed Monday at $139.94.

Tesla confirmed earlier in the day that it sold 6,900 cars in the fourth quarter, a new record for the company as well as a roughly 20% increase over its previous guidance for the term. We've revised our full year 2013 revenue estimate to $2.41 billion and our EPS estimate to $.42. 

Demand for the Model S remains strong enough that the company will likely meet, and possibly exceed, its goal of 30,000 deliveries in 2014. Tesla is also optimistic that it will be able to begin shipping its new SUV offering, the Model X, sometime in the fourth quarter. The Model X will be priced about 6% higher than the Model S to start, or about $74,000. However, considering most customers will likely opt for the higher performance battery and other options, we're estimating most customers will wind up paying somewhere between $105,000 and $110,000. For these purposes, let's say $107,500 per Model X. If Tesla can deliver 200-300 Models X by the end of 2014, that's another $21.5 million - $32.3 million in revenue.

Elon Musk and a Model X

Perhaps the company is being optimistic, and the Model X doesn't arrive until early 2015. It won't have much of an impact long term. Tesla doesn't disclose reservation statistics any longer, but the general consensus is that about 7,000 orders were put in for the vehicle through the end of the fourth quarter. 

The price jump came despite Tesla also issuing a "recall" for a Model S charging adapter, which in some cases have heated up to the point of melting and have resulted in short circuiting and possibly fire. We put "recall" in quotation marks because no parts actually need to be replaced. The problem is being addressed with new software that Model S owners download and install to the car, so think of it more as an update. Tesla shouldn't fret too much about fire concerns as long as the incidents are few and far between. After all, gasoline powered cars can catch fire too.

The better-than-expected sales in the fourth quarter bode well for 2014 and beyond. The company is aiming to manufacture 30,000 cars in 2014, roughly 50% more than 2013. Tesla's factory in Fremont seems capable of getting the cars assembled. The main impediment has been getting its hands on the lithium battery packs. A new deal with Panasonic is expected to lower costs and give Tesla more battery inventory, but the pact won't alleviate the shortage in the near term.

Demand for the batteries will skyrocket once Tesla begins work on its third vehicle, a more affordably-priced car that's tentatively known as Model E. The car is still only being discussed, but the company is aiming for a $33,500 sticker price. Tesla is also considering building a factory of its own to meet battery demand.

Tesla shipped about 1,000 cars to Europe in Q3 2013, and is hoping to begin selling to Asia in 2014. The company is still expanding its network of Supercharger stations in America and Europe. There are 65 stations in North America, and 14 in Europe. The stations can give a battery a full charge in an hour, or top them off in about 20-30 minutes, free of charge. The Supercharger network still needs to expand considerably to make it more convenient for local drivers. The company boasts that a Model S can be driven across country without having to pay for a recharge. Realistically though, how many times will a person use the car to drive cross country? An average of once seems like a high estimate.

Current Supercharger network
Planned Supercharger network by year's end 2015

The difference between the network as it stands now (top) and what it projects to in 2015 (bottom) appears striking upon first glance, but the chargers are still spread far enough apart that using them for local driving will be a nuisance unless the car owner lives relatively nearby. Once the Model E arrives, though, owners could utilize the chargers to take long-range trips or vacations for free (though it'd be significantly more time consuming than flying). Tesla will keep adding the charging stations, which cost $150,000 - $300,000 per site, but don't require an attendant to monitor them.

Sevcon ( Nadaq - SEV ) -- Back in Control

Sevcon (SEV $7.25) is a leading independent provider of control systems used in electric vehicles and in other applications that employ electronic motors.  Over the past year the company has expanded into the hybrid engine market, as well.  Sevcon's microprocessor based controls convert and regulate the electrical energy generated by a vehicle's power source to maximize the performance of the unit's motor.  Sevcon does not make battery packs or the motors themselves.  High volume manufacturers normally perform the entire process in-house.  Sevcon works with more specialized niche producers who require custom solutions.  Over the past decade the company established a strong position in the off-road industrial vehicle market.  That included electric fork lift trucks, aerial lifts, mining vehicles, and a variety of other work machines.  Sevcon additionally made significant inroads in the electric motorcycle market.  More recently, Sevcon supplied the control systems for a tiny "city car" manufactured by Renault.  That model failed to win market acceptance, in large part due to the weak economy in Europe.  But the partnership created the expertise Sevcon needed to pursue additional vehicle programs.  The company also branched off and recently began to penetrate the high potential hybrid vehicle market.

Meantime, profitability has been restored following the unexpected Renault downturn.  The French car maker ordered 90% fewer control systems in fiscal 2013 (September) than it did the prior year when the Twizy initially was introduced.  Costs have been reduced, despite the fact more engineers were hired last year.  Existing programs are returning to life, except in the mining area.  The fork lift and aerial lift segments have been especially robust.  The motorcycle business has been solid, too.  Earnings improved 62% in Q4 (September) to $.13 a share.  Sales advanced 11% to $8.87 million.  Several OEMs were added to the client roster last year.  Most of those won't contribute meaningful revenues in the current year, as their new vehicles go through the engineering process.  Substantial gains are possible over the next 2-3 years as those new vehicles reach the market.

China offers exceptional opportunity.  Sevcon declines to identify its business partners until the vehicles they are working on achieve commercialization.  The company has devoted significant effort to the Chinese market over the past few years, though.  It's believed that several relationships have been developed.  The Chinese government recently implemented a major electric vehicle initiative, primarily to help improve the pollution situation in its larger cities.  Electric buses will receive an $80,000 per unit subsidy under the new regime, making them far more economical than diesel or natural gas alternatives.  Sevcon's long experience in the mining and industrial equipment area provides an established track record it can leverage when pursuing those contracts.

Sevcon also has moved aggressively into the hybrid automobile market in Europe.  Electric cars have become popular and could garner 5% of the entire auto market during the next decade.  Hybrids hold much greater potential, though, because they have unlimited driving range.  A wide array of approaches are in development across the auto industry, combining gasoline, battery power, natural gas, and fuel cells to provide high performance, acceptable cost, great mileage, easy refueling, and top notch reliability.  Hybrid's market share may increase 5% a year beginning in 2015-16 and keep rising at that rate until it reaches 50% in the mid-2020s.

If Sevcon can catch either of those waves results could surge over the long haul.  Spectacular stock price performance is possible in light of the company's modest share count.  A recent board of directors change may foreshadow some joint ventures or other strategic moves.  Three new members were added in December.  Our 2-3 year projections are speculative due to the secrecy surrounding the company's R&D programs.  Realistically, though, sales could attain $50-$75 million to provide earnings of $.75-$1.25 a share.  (The high end figure assumes the sale of an additional 1.5 million shares to finance growth.)

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UQM Technologies ( Nasdaq - UQM ) -- The EV Power Train

UQM Technologies (UQM $2.15) is a leading provider of complete power train systems for the electric vehicle market.  The company builds compact motors that deliver high levels of torque.  Those engines also feature high power density (output to weight) and energy efficiency.  UQM combines its motors with sophisticated control systems that maximize performance.  The engines can work with virtually any power source including electric batteries, fuel cells, and hybrids.  Applications include automobiles, trucks, buses, and work machines.

Government regulations and subsidies, both here and abroad, are driving the market.  Corporate (fleet) Average Fuel Efficiency ("CAFE") standards will rise to 56 mpg in the next decade.  Similar hikes are on tap in other advanced nations.  Auto makers currently are engineering a new generation of vehicles to satisfy those requirements.  Lead times typically extend 4-5 years.  So most of the next batch of cars and trucks won't be commercialized until 2015 or so.  Final design decisions will be made soon, however.  Once everything is finalized key suppliers are likely to benefit from lengthy production cycles that could ramp to high levels if consumer demand responds.

UQM Technologies is working on several EV programs.  The most promising from a near term perspective are in the truck and bus areas.  Those manufacturers tend to be more willing to outsource motor production than auto producers.  Many of the OEMs that UQM deals with have been reinforced by loans and other investments by the Obama Administration.  Boulder EV is developing a series of electric delivery trucks for United Parcel Service.  Electric Vehicles International iw pursuing a similar vehicle with PG&E.  The utility is pursuing the technology to meet California's stringent green energy regulations.  Eaton is making electric engines for Freightliner and Paccar.  Zenith Motors is making a new line of shuttle vans .  And Proterra is working on all electric transit buses for the U.S. market.

UQM also is supplying electric power trains to Audi for its A-1 vehicle.  That project remains in the development stage and may never roll out due to a fairly high sticker price.  But additional Audi projects are in the pipeline.  UQM additionally is supplying motors for the new all electric SAAB sedan, which probably will be commercialized and could ride on Tesla Motors' coattails in the luxury market.

The Chinese market offers exceptional opportunities, as well.  New government regulations, designed to combat air pollution, require that 30% of all new transit buses use electric motors by 2015.  That figure could be exceeded in light of the $80,000 per unit subsidy the government is offering.  Electric powered trucks and work machines are eligible for $24,000 subsidies, moreover.  And electric automobiles will benefit by $7,000 to $10,000 per unit.  UQM Technologies began working with a major Chinese bus manufacturer two years ago.  Design work is approaching fruition.  A final contract has not been signed yet.  But UQM recently announced plans to raise $30 million in fresh capital to finance growth.  Some of the programs the company is working on could be nearing an inflection point.

Financial results are likely to improve in 2014.  We estimate sales will double to $20 million, pushing income above the break even mark for the first time.  In 2-3 years sales could reach $50-$60 million, yielding fully taxed earnings of $.10-$.15 a share.  Growth could be sustained at superior rates beyond.  Volume is likely benefit directly as the EV and hybrid vehicle markets expand.  The company also is developing an alternative to the rare earths that currently are essential components in electric engines.  That could provide a competitive advantage while also providing lucrative licensing opportunities.  Military applications hold further potential.  Research is underway at most military contractors to electrify a wide range of military vehicles.  Higher fuel economy created by hybrid systems could expand range and reduce logistical costs.  Having on board electricity generation also could support more surveillance and other types of equipment; and laser weaponry.

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