The High-End Electric Car Market Just Got Serious
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) has had a virtual lock on the high end of the electric car market until now. The Volt, Leaf, and Prius all target the lower end. But BMW's (NASDAQOTH: BAMXY) new i3 is squarely aimed at Tesla's core customer.
A Near Miss
Only a short time ago, Nissan (NASDAQOTH: NSANY.PK) decided to delay its all electric Infinity by at least a year so it could include better technology. An Infinity electric would have been the first real direct competitor to Tesla. Of course, Nissan also makes the Leaf, which is targeted at the lower end of the market. That's the part of the market that Tesla wants to get into, but hasn't been able to.
Tesla must have breathed a sigh of relief that a competitor with better distribution, a well-known brand name, and a loyal customer base decided on a take-it-slow approach. However, it still has to look at Nissan with a little envy since the company has been able to enter the mass market that Tesla craves.
Nissan's top and bottom lines fell steeply in the 2007 to 2009 recession. After bottoming in fiscal 2010, the top line is again heading higher. Profit margins, however, are only about half of what they were in the middle of the last decade. So while sales and earnings have been generally on the mend the last few years, the company still has some room to go. For example, despite a sales improvement in fiscal 2013, earnings were flat.
Still, with a dividend yield of about 1.4% and a PE of around 12, Nissan is a decent car company trading at a reasonable price. Especially compared to Tesla.
Too Much Money
Tesla was built from the ground up to sell electric cars. It has wonderful technology and a well received high-end offering, but the cars are expensive. A lower priced version had so few pre-orders that it was never made. Still, the success of the company's recently launched sedan pushed the once unprofitable automaker into the black.
That single event led to a share price advance of over 350%. Even using generous assumptions of the company's earnings potential, the shares are way overpriced. To bring the company's price to earnings ratio in line with that of Toyota, which sells the Prius, would require the company to earn nearly $2.30 a share each quarter. The company made $0.10 a share in the first quarter and lost money in the second on a GAAP basis. It has a long way to go.
Moreover, Tesla is looking to build out an electric “gas station” network. That needs to happen, but the cost of such a move will weigh on the bottom line. So it's hard to imagine the company's bottom line is set to explode higher any time soon. That said, investors could still look at its solid position in the high-end electric market to justify the lofty price tag. But not any more.
In Come the Germans
BMW just introduced its i3. Like the Tesla Model S, it was built from the ground up. This is a big problem for Tesla, since now the only differentiation it has to offer is its American heritage. BMW clearly has better brand recognition, better distribution, and an already loyal customer base.
Moreover, for customers worried about range, BMW is planning to offer a car-share service as an add on. So much for needing an electric “gas station” network. There's also supposed to be a gas engine add on, too, like that offered on the Prius.
BMW is one of the big names in luxury cars. While sales were impacted by the recession, the company's top line held up much better than mass market players. In fact, sales are now about a third higher than they were prior to the recession, totaling nearly $77 billion in 2012. And earnings of about 2.60 euro in 2012 are over 60% above pre-recession levels.
The company has a PE of about eight and a yield of around 2.3%. Investors looking for a high-end car maker in the electric car space would do well to look at BMW.
Not Worth the Risk
Tesla is a great story stock, but that story has taken the shares to unsustainable heights. There aren't enough barriers to entry for the other automakers to protect Tesla's business. With BMW now in the same space and Nissan looking to get in, albeit a year or so from now, Tesla is going to be up against some stiff competition. Those seeking a high-end electric play should go with BMW. Or, with a broader lineup, wait to see what Nissan has to offer with its delayed Infinity electric.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . 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!