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.)

( Click on Table to Enlarge )

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.

( Click on Table to Enlarge )

Tesla Motors (Nasdaq - TSLA) Still Cruising Despite Concerns

It seems nothing can go wrong for Tesla Motors (TSLA $166.00). The stock price has quadrupled since the beginning of the year, even in the face of concerns about the company's ability to manufacture and deliver its Model S, potentially damaging reviews, and several states have banned Tesla from selling the electric cars within their borders. In California, the Model S has outsold other luxury car manufacturers such as Porsche, Jaguar, and Land Rover. The U.S. National Highway Safety Traffic Administration recently gave the car the highest-ever crash safety rating.

There are questions that remain, such as how the car's battery will perform a year or two down the road, and if the battery charging infrastructure that Tesla is installing across the country will be adequate for the car to function as a primary vehicle. CEO Elon Musk is planning to take his sons on a cross-country road trip in the Model S, and charging it only at the company's network of Supercharger stations. The network is growing, but even in the areas with the most charging stations (California and New York/New Jersey), the Superchargers are too few and far between to make using the Model S for everyday activities realistic, much less convenient. The closest Supercharger station is 11.5 miles from my residence. The next closest is 83.5 miles away. I'm not sure exactly how many gas stations are within 11.5 miles from me, but I'd guess it's a few more, at least.

The Superchargers are free to use and solar-powered so the car is operating on zero emissions post-manufacture (mining the lithium used for the battery is not environmentally friendly). Tesla is going to need to drastically expand the Supercharger network to make the upcoming Model X work. It's being marketed to the middle-class, so it most likely will be used by people to commute, bring their kids to activities, etc. Tesla is claiming that by the end of 2014, the network will cover "80% of the U.S. population and parts of Canada," whatever that means.

The Superchargers are only practical for traveling between cities, something the average motorist isn't doing regularly. So an owner would have to plug the car in at home, pay for the electricity to charge the car, and say goodbye to the zero emission claim, since most of the electricity in the U.S. is still produced by fossil fuels. The car itself may not emit greenhouse gases, but the power plant charging it up still does. Also, while the Supercharger can give the battery a 50% charge in 20 minutes, it takes considerably longer to juice up at home or other charging stations. The battery also drains when the car isn't in use, so it has to stay plugged in.

Resale value is another factor that could have an effect on sales moving forward. The Model S hasn't been out long enough for anyone to be sure how well they age. Some studies have estimated that the battery packs in the Roadster, the precursor the Model S, will keep 70-85% of its initial capacity after being charged 300-500 times. Tesla says it should retain about 70% after 50,000 miles. Others have speculated the battery could last 20 years. But there are myriad factors that contribute to battery health, and there isn't enough data available for anyone to know for sure.

What we do know is that the battery packs are expensive, and the secondary market would be impacted if buyers were forced to install a new battery in an old car. But the cost for a new battery has been declining, so it may turn out to not be of great concern.

Potential Model X customers are probably willing to overlook these concerns. Tesla is cool right now. Musk is trending into Steve Jobs territory. The Model S has received rave reviews from publications and owners, and was named the 2013 Motor Trend car of the year. The Model X could be a hit if it can do a good enough job of replicating the experience of driving the Model S while slashing the price tag.

Customers can reserve a Model X for a refundable $5,000 ($40,000 for the "Signature" edition) right now, even though the car isn't expected until late in 2014. And that's just when the first shipment is expected. Someone could leave $5,000 in limbo for a car that takes at least a year and a half to arrive, or, according to Tesla's terms of service, might never arrive. Five-thousand dollars probably isn't a big deal to someone who can afford the more expensive Model S; middle-class families surely would be less inclined. And since the reservation price is fully refundable, those who decide to place an order have a lot of time to decide whether or not they really want to go through with it.

Tesla has been running more smoothly this year than many thought they would. The Model S pushed the company into profitability. It's critical that the Model X succeeds for Tesla to take the next step. A good deal of that success hinges on the company's ability to grow its Supercharger network. Time is working both for and against Musk & co. We'll see if they can pull it off.

Solar City ( Nasdaq - SCTY ) -- Losing Money Despite Massive Subsidies

Solar City's stock (SCTY $32.00) has quadrupled in price since it became publicly traded last fall.  The company has done a masterful of job of influencing Wall Street expectations.  In the March quarter a loss of $.36 a share was reported (adding back stock option expense).  Sales improved 21% to $30.0 million.  The shares surged in advance of the report and maintained most of those gains despite the relatively dismal showing.  Gross margins narrowed by 7% on the solar systems the company sold in the quarter.  The gross margins on leased installations, which are depreciated over 30 years, also fell by 5%.  (For income tax purposes, depreciation is taken on an accelerated basis over 6 years.)  Solar City reported it cut production costs significantly.  The only explanation for the reduced manufacturing margin is sharply lower selling prices.  Selling and administrative expenses climbed 40% in the March quarter.

Solar City's explanation is that most of the "profit" it generated was deferred into future years.  The company's leased systems require homeowners to pay monthly fees for electricity that escalate at a 2.9% annual rate over 20 years.  Solar cell efficiency, using today's technology, generally deteriorates 2%-3% a year as a result of use.  Solar City uses financing partners that take advantage of the 30% tax credits issued by the U.S. Treasury for solar installations.  The company still pays interest on the balance, which it projects to decline from current levels.  The company is installing systems at a rapid pace, to be sure.  If the payment stream holds up, and the re-sale value of the systems is as good as the company expects after the initial 20 years, (recall, depreciation is taken over 30 years), and market interest rates don't rise, earnings could develop at some future time.

U.S. Treasury subsidies are scheduled to end in 2016.  That will force costs to decline by 30% just to break even on current pricing, which still is inadequate to produce a profit.  More worrisome, Solar City is betting against the likely trend in solar technology advances.  Modest improvements won't upset existing buyers.  But if nanotechnology based cells or other advances make it into mass production huge gains in efficiency could be achieved.  Those units could make today's systems look like horse and buggies.  Solar City no doubt would hire swarms of lawyers to force its existing customers to stick with their old fashioned systems.  But enormous write offs could occur if that effort fails.

Solar City's antagonistic approach toward the utility industry is likely to breed further trouble.  Electric utilities to date have put up with the inefficiencies and poor economics associated with solar power.  But as more homes go off the grid that accommodative policy is unlikely to continue.  Over the long haul the utilities themselves are almost certain to become solar installers to keep control of their networks.  Independents like Solar City may wind up resigned to serving niche markets.

The Enron style of accounting used by Solar City presents additional concerns.  For years Enron was the apple of Wall Street's eye, even though few if any of the analysts following the company were aware of its off balance sheet activities.  Every analyst we've talked to about Solar City can't explain the company's financing partnerships, either.  Perhaps they're structured to generate a huge windfall in the future.  More likely, they entail a complex structure with a variety of danger points.  These shares probably will fare well as long as the music keeps up.  Enron was a high flier for nearly a decade.  We think investors are playing with fire when it comes to these shares, though.  Better speculations are available.

Sevcon ( Nasdaq - SEV ) -- Makes the Adjustment

Sevcon (SEV $4.25) reported unexceptional Q1 results.  The company is a leading independent supplier of controls for electric and hybrid vehicles.  The systems take directions from the driver and make the engine respond, maximizing efficiency and power.  Sevcon has a long history in the work machine market.  That segment fell on hard times last year when demand for mining and construction equipment declined.  Electric forklift truck demand slipped in the March period, as well.  Part of that is believed to the result of a shift towards natural gas powered trucks.  Sevcon entered the on road electric vehicle segment a few years ago via a relationship with Renault.  The company provided the controls for the 2-seat Twizy city car that Renault introduced, initially to relatively strong demand.  Weak economic conditions in Europe subsequently caused volume to slide, though, and that trend continued in Q1.  Off-road electric motorcycles and ATVs remained solid.

Sevcon responded to the slowdown last year by moving into the hybrid controls segment.  That effort hasn't resulted in large production runs yet.  But several programs are believed to be in the pipeline.  Sevcon's new Gen-4 system is geared primarily for the hybrid market.  The company also has beefed up marketing efforts in northern Europe, where the economy remains sound.  And pick-ups appear to be underway with the Renault and forklift truck lines.  Results probably will improve modestly over the next 1-2 quarters as the new opportunities reach fruition.  Significant gains are possible beyond.  Electric vehicle demand could advance in the wake of Tesla Motors' recent success.  The move into hybrid applications offers even greater potential.  Our 2014 estimates may prove ambitious.  But it won't take much to get earnings moving since only 3.35 million shares are outstanding.

( Click on Table to Enlarge )

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 )