Should You Buy This Best-Case Auto Scenario?

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

Tesla Motors (NASDAQ: TSLA) is pure speculation, and very few would deny it. In many ways, Tesla is similar to a biotechnology company, with a newly approved product and high expectations. Hopefully, sales meet the high expectations, but there are no guarantees. Therefore, let’s look at a best- and worst-case scenario, using analysts as a guide, to assess risk and reward, and to determine where to invest in the auto space.

Tesla is trading at a whopping 13 times sales, with an operating margin of negative 33%. Analyst coverage on the stock lies upon a wide spectrum, ranging from $84 to $300. Currently, Tesla trades at $120, meaning there is a long way for it to trade one way or the other.

Where Does It Go From Here?

Tesla’s upside/downside will be determined by units sold and margins. Currently, the average price of a Model S is near $100,000. However, Tesla has already said that it’ll roll out cheaper versions, which are expected to become the bulk of sales.

Northland Capital and Doughtery have excessively bullish price targets, at $230 and $300 respectively. However, Doughtery also gives a $100 cushion, with a possible target of $200 for lack of execution.

Therefore, how is it possible that we could validate a price target over $200? Tesla would have to maintain a global market share over 3% in the entry and mid-luxury categories.

Northland believes that with additional investments, Tesla’s current facility could accommodate 500,000 vehicles per year, which is high above the company’s own guidance of 300,000.

Assuming Tesla’s average price would be lowered to $50,000 with the introduction of cheaper vehicles, $25 billion in revenue would be possible with 500,000 vehicles annually. At $230, Tesla would trade at one times annual sales, which isn’t hard-pressed.

With operating margins of 15.2%, consistent with analyst expectations, Tesla at $230 would be cheap at less than 10 times earnings. However, this is the absolute best case scenario.

The bear case calls for annual auto sales of just 105,000 units and operating margins of 14.6%, courtesy of Goldman. If Tesla’s price-per-unit stays at $50,000, annual revenue falls to slightly more than $5 billion.

At $84, Tesla would have a market cap of near $10 billion, or two times sales. Once again, this particular scenario would also validate such a price target.

What Is The Best Auto Play?

Whether you are long or short, it is hard to speak in absolutes when discussing Tesla. Personally, I sit more on the bear side, and would not want to own Tesla at its current price.

If Tesla achieves the worst-case scenario at 105,000 units annually, it would still take several years to reach this point. In the first five months of 2013, Tesla sold less than 9,000 units. Therefore, long-term investors have an extended wait for their investment to appreciate, especially if they are waiting for 500,000 units sold annually.

I think it is so funny that investors are so willing to jump on the Tesla bandwagon, paying 13 times sales, but discount the outlook for Ford (NYSE: F) and General Motors (NYSE: GM).

I often wonder if investors even realize that the Chevrolet Volt sold over 7,000 units in the first five months of 2013. Hence, the Volt is not too far behind the Model S. Yet, we celebrate Tesla, while General Motors trades at 0.3 times sales.

General Motors is cheap, and it has a lot of catalysts into the second half of this year. On Tuesday, General Motors announced that global sales rose 4% year over year, despite sluggish sales in Europe. Moreover, General Motors is expected to announce a dividend later this year, as the government slowly but surely removes its investment in the company. This will serve as a catalyst.

Ford is also attractive, trading at 0.47 times sales. Ford’s premium to General Motors is most likely in response to its dividend of 2.3%. However, Ford is also growing fast, increasing year-over-year revenue 10% last quarter alone. Therefore, at 10 times next year’s earnings, Ford looks to be a good investment, much more attractive than Tesla’s 133 times next year’s earnings.

Conclusion

Tesla's best-case scenario is still expensive compared to Ford and General Motors’ current valuation. Investors must remember that auto sales are expected to continue growing over the next seven years.

While electric vehicle growth is expected to outpace gas-powered automobiles, keep in mind that General Motors is already in the electric vehicle market, and Ford is expected to make its entrance. Therefore, if I were seeking an investment in the industry, I would much prefer a cheaper General Motors or Ford, and would not rely on a best-case scenario for Tesla to produce gains.


Sherrie Stone has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and 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!

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