Tesla – Is There Steak To This Sizzle?

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Peter Lynch used to say that he would always hear about stocks that were surrounded with so much sizzle, that investors didn't realize that there was no steak. I keep hearing about how Tesla (NASDAQ: TSLA) is going to produce electric cars “for the masses” in 2012. Their Model S is supposed to be this mass market car. This car has three different battery levels from 40 kWh to 85 kWh. The highest battery level is the one that is supposed to be available first. This 85 kWh vehicle has an estimated range of 300 miles on a charge, and goes 0 to 60 in 5.6 seconds. The battery will have an 8 year warranty with unlimited miles. This “mass market” car with the 85 kWh battery starts at $77,400 before a $7,500 tax credit. The other two batteries have lower ranges between 160 and 230 miles. These lower range vehicles are priced $57,400 to $67,400, again before the $7,500 tax credit. The lower two models are not expected to come out until Fall 2012 and Winter 2012 respectively.

Now that you know a little bit about Tesla, the question is how is the company doing in moving toward profitability? Looking at the last 4 quarters we see:

<table> <tbody> <tr> <td> <p><strong>Quarter</strong></p> </td> <td> <p><strong>Operating Cash Flow</strong></p> </td> <td> <p><strong>Capital Expenditures</strong></p> </td> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p><strong>Debt-to-Equity</strong></p> </td> </tr> <tr> <td> <p>Dec. 2010</p> </td> <td> <p><span>-$34,284.00</span></p> </td> <td> <p><span>-$17,148.00</span></p> </td> <td> <p>31.00%</p> </td> <td> <p>0.349</p> </td> </tr> <tr> <td> <p>Mar. 2011</p> </td> <td> <p><span>-$43,297.00</span></p> </td> <td> <p><span>-$20,476.00</span></p> </td> <td> <p>36.77%</p> </td> <td> <p>0.613</p> </td> </tr> <tr> <td> <p>June 2011</p> </td> <td> <p><span>-$22,488.00</span></p> </td> <td> <p><span>-$54,314.00</span></p> </td> <td> <p>31.81%</p> </td> <td> <p>0.386</p> </td> </tr> <tr> <td> <p>Sept. 2011</p> </td> <td> <p><span>-$21,491.00</span></p> </td> <td> <p><span>-$68,844.00</span></p> </td> <td> <p>29.86%</p> </td> <td> <p>0.767 </p> </td> </tr> </tbody> </table>

I wanted to lay this out so you can judge what has been happening. Now of course the Model S can't be included in these numbers, because it's not in production yet. The two things that jump out as a concern to me is the decline in gross margin, and the increase in debt-to-equity. This is a company expecting to release their two most popular models, the Model S and Model X, in the next few years. So how much can we really learn from their current financials? The fact that Tesla has a declining Gross Margin, and their debt-to-equity has doubled in the last year isn't reassuring. The fact that Tesla is spending between 84 and 103% of their revenue on R&D is another concern.

Let's look at Tesla's expected growth going forward, and see what the company is expected to do in the next few years. Analysts are expecting Tesla to post a full year loss of about $1.90 for 2012. The company is expected to post a profit of $0.89 for full year 2013. If we assume these estimates are correct, the stock has a two year forward P/E of 38.40. These same analysts expect 25% growth for the next few years. This gives the stock a PEG of 1.54 based on earnings expected in 2013! In addition, in the last 90 days, this 2013 estimate has been cut drastically from $1.30. This represents a 31% decrease in expected earnings two years from now. The most disturbing part is these estimates are with 155% sales growth in 2012 and 207% sales growth in 2013. Analysts are saying, with massive revenue growth the company can't meet their expectations from just 3 months ago.

As I see it every automaker is Tesla's competition. With as much as the Tesla story sounds great, the numbers are just not there yet. I'm willing to go with Peter Lynch's theory on Tesla. He made the comment that if the company is really going to be a great investment, it will be a great investment year after year. Very rarely do you have to buy in while the company is still losing money. I like the Tesla story, but I'm willing to sit on the sidelines and watch until Tesla proves that it can sell cars and SUVs at a profit. Until then I would not touch Tesla stock. Instead I would suggest a profitable auto maker who already produces an electric vehicle. Ford (NYSE: F) is profitable to the tune of $1.7 billion in positive cash flow on average in the last 4 quarters. Ford has paid down debt by about 9% in just the last year. In addition, the company is beginning a dividend in March that gives the stock a yield of 1.57%. Ford makes the Ford Focus Electric, which is expected to get about 100 miles between charging. While it won't go 0 to 60 in under 6 seconds, it does cost about $17,000 less than the Model S from Tesla. If there is a mass market electric I believe the Ford Focus Electric has more of a chance of mass market appeal than the Tesla S. In a few years that could change, but for now Tesla is more sizzle than steak.

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