Danger! High Voltage Stock Ahead!
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a stock skyrockets for reasons that are purely based on high hopes for the future that are completely unjustifiable by current and past performance, it is time to start getting fearful. Such is the case with Tesla Motors (NASDAQ: TSLA), a company with stock that has nearly quadrupled since last October.
If you had the foresight to invest in this electric car maker then kudos for making a killing, but I highly advise you to get out now. You are much better off investing in an automobile manufacturer with a proven track record of success. Ford (NYSE: F), for example, which just this past Father's Day celebrated its 110th birthday. General Motors (NYSE: GM) is another option, and will be turning 105 this September. Compared to these time-tested titans, Tesla is a toddler at the age of 10.
One quarter of profitability
A $12.2 billion dollar market cap makes Tesla Motors worth about one-fifth and one-third of Ford and General Motors, respectively. That strikes me as ludicrous seeing as how Ford and GM both have hundreds of quarters of profitability under their belts, while Tesla has a grand total of one.
In the first quarter of 2013 Tesla Motors generated an awe inspiring $11.4 million dollars in pre-tax profits. During the same quarter, Ford's pre-tax profits were $2.3 billion while GM pre-tax profits for the first quarter were nearly $1.6 billion.
Tesla's claim to fame is being the first company to mass produce an electric vehicle that is highway compatible. This is certainly cool. Vehicles running on pure electricity are undoubtedly better for the planet than ones running on fossil fuels. Until Tesla has a couple years of proven profitability under its belt, however, I regard the company as more speculation than investment.
Any chance of a dividend?
As investors, our returns come from two sources: dividends and capital gains. As a company still in its infancy that has yet to record any serious profits, Tesla's odds of paying a dividend anytime soon are slim to none.
GM hasn't paid a dividend since 2008, although CEO Dan Ackerson did mention earlier this month that the company's finances were sound enough to consider reinstating the dividend. Don't hold your breath, though, as GM has more important financial matters it must attend to before it can reward shareholders with a dividend.
Meanwhile, Ford's dividend yield stands at a healthy 2.7%. Not a monster of a yield, but the payout ratio is only at 17% which means that there is plenty of room for growth.
The ratio of price to tangible book value is horrifying
70.19. That's the price to tangible book value ratio of Tesla Motors right now, 70.19! Anyone who calls themselves a value investor ought to be appalled by such a high ratio. A core tenant of the Ben Graham school of value investing is to never pay much above book value. Tesla's valuation compared to it's tangible worth is out of the stratosphere, no the exosphere.
At the same time, Ford and GM sport price to tangible book ratios of 3.36 and 2.4 respectively. This is still more than Ben Graham would've been happy paying, for sure. Sometimes paying a bit above book value can be justified for an enterprise with significant intrinsic strength, however.
Final foolish thoughts
I think that what Tesla is doing is really cool. Sadly, coolness is one of the last things you want in your stocks; boring and under the radar is the way to go. Tesla is both a top dog and a first mover in the electric car industry which will more likely than not be huge someday. Consumer Reports called its Model S the best car that they've ever seen. What Tesla is doing is great for the environment and I love owning companies like that.
Tesla is still a company that has no proven track record of success, however. Hurdles lie ahead for the company. While the Model S may be the greatest automobile ever to hit the market, it still costs over $60,000 which isn't something that the average American will be able to afford anytime soon.
Tesla's current valuation is in no way, shape or form justified by its fundamentals. It's all based on hype at this point, and investing in hype can have dangerous consequences. Can anyone name a company that they invested in while selling for over 70 times its tangible book value that turned out to be a winner?
Tesla may become the dominant automaker in the world at some point, but right now that is far from certain. Unless the company increases its earnings at rates that have never been achieved before, buying its stock now would be a very bad choice. Be patient, and Tesla will likely fall from its lofty heights. In the meantime, you are far better off investing in Ford or GM.
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Fool blogger Ryan Palmer 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!