Electric “Gas” Station Build Out

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

Tesla (NASDAQ: TSLA) shares have risen dramatically over the past year. Now, after turning its first profit, it is trying to build the electric “gas” station infrastructure needed to support wider adoption of its all-electric cars. That's a great idea, but the stock is too expensive.

Infrastructure

Gasoline powered cars are the main form of transportation around the world. Over decades of use a deep infrastructure has been built up in support of gasoline. That system goes from pulling oil out of the ground to putting gasoline into passenger cars. All of that took a long time and a lot of money to create. Alternate fuel sources have to compete against that infrastructure as well as the gasoline-focused auto industry if they want to be considered a legitimate rival.

Hard to love

Tesla's electric cars are currently more of a novelty for the rich than a mass market product. There are good reasons for this. The first is that the cars Tesla sells are expensive, costing close to $100,000. A second reason that Tesla's cars aren't likely to get broader acceptance is limited range. Since the car has to be plugged in to charge and there are very few public charging stations around, the distance issue is a big stumbling block. That's especially true for a luxury priced car. After all, why spend more money for a less capable car?

Too expensive

Tesla just announced its first quarterly profit and its shares have risen to new highs. While turning profitable is exciting, Tesla shares are being afforded a valuation way in excess of its entrenched auto peers. Ford and General Motors have price to earnings multiples in the high single digits. Even if you generously assume that Tesla earns twice what it made in the first quarter in each of the next four, its P/E is still over 10 times higher than that.

Investors are pricing Tesla as if its all electric cars are going to replace gasoline-powered cars overnight. That simply can't happen and investors are likely to be disappointed when results don't live up to the market's grand expectations.

Pushing the accelerator

Tesla is aware of the range problem. Bloomberg recently reported that the company is looking at “tripling the area covered by solar-powered 'supercharger' stations so that owners of the Model S sedan can drive to New York from Los Angeles, according to Musk, Tesla’s chief executive officer...”

Essentially, Tesla plans to build the electric “gas station” network needed to support wider adoption of all-electric vehicles. That's a good long-term decision for the industry, but building out an infrastructure to support electric cars is going to be expensive. Investors need to question if the company can remain profitable and build out this support network.

Natural gas

Natural gas has been increasingly used as a fuel source for vehicles. However, its proponents aren't going after the consumer market. For example, more than 80% of Waste Management's (NYSE: WM) new garbage trucks are powered by Natural gas. It has around 40 natural gas-fueling stations, with plans to build dozens more.

Waste Management alone has a truck fleet of more than 2,000 natural gas vehicles, so footing the bill for “gas” stations makes sense. Using the abundant and currently cheap fuel not only saves the company money, but it also burnishes its image as an environmentally focused trash company. Around 15 of its stations are publicly accessible and it has agreements with third parties for fleet access to around 10 stations.

For green-minded investors, Waste Management is solidly profitable and has a yield around 3.4%. Although its natural gas push may not be the long-term future of the auto industry, it's making money now, helping to clean up the world and saving money by pushing the envelope on clean fuels.

A broader gas play

Waste Management's trucks, however, have local routes, so going vast distances isn't an issue. That's where Clean Energy (NASDAQ: CLNE) has taken a broader path. It owned, operated, or supplied 348 natural gas stations in 32 states at the end of 2012. And its big push of late is to get America's trucking fleet to switch to natural gas.

In support of this effort, Clean Energy is building fuel centers for long-haul trucks along the country's interstate highway system. It has build around 70 stations so far. The company hasn't made money in over five years because it has been spending to build out its natural gas support network. However, if natural gas catches on, the shares could have plenty of upside ahead.

The future or profits

With a much lower share price, a smaller and likely more receptive market, Clean Energy looks like it is backing a more promising alternate fuel source than Tesla over the near term. While Tesla piques the imagination, its shares have risen too far too fast without a material market. And spending to build out a fuel station network will only make it harder to make money. Waste Management, meanwhile, is a conservative way to enter that alternate fuel space.

The movement toward alternative energy is gaining momentum. One potential opportunity in this field is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Learn everything you need to know about Clean Energy Fuels in The Motley Fool's premium research report on the company. Just click here now to claim your copy today.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels, Tesla Motors , and Waste Management. The Motley Fool owns shares of Tesla Motors and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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