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Tesla's pretty cars belie its unsightly numbers

Tuesday, April 7th, 2015

I am a car enthusiast and think Tesla Motors Inc.’s cars are beautiful and very technologically advanced.

However, liking something and investing in it are two different things.

Tesla (Nasdaq: TSLA) has pulled off its 52-week high of $291 per share with a current level of about $190 per share, closer to the 52-week low of $177 per share.

So is a pullback in a stock the right time to invest or has the best time come and gone?

It makes other car companies came to mind. I'm talking about past car companies that were big hits such as Studebaker, Rambler and DeLorean — although I'm not sure Rambler was ever a big hit. These car companies all had big fanfare and high expectations in their early years. However, they all went bust.

This is not to say Tesla will go this route, but investors need to understand it can happen.

So with that, I decided to step away from my love of cars and look at Tesla as an investment and not be blinded by how beautiful its cars are.

A look at the valuation ratios is rather scary, starting off with no PE ratio — meaning the company has had no earnings over the past 12 months. The industry average is 21.1. Price to sales for Tesla motors is very expensive at 7.38 — 14 times the industry average of 0.53. Price to tangible book value is 25.9, or roughly 10 times the industry average of 2.8.

On a positive note, the company has no intangible assets, so while investors are paying a high price for the book value of this company, at least they are paying for tangible assets.

Price to cash flow is 6.4 for the industry. Unfortunately, it appears Tesla has had no cash flow over the past 12 months and is apparently burning through cash.

Sales for Tesla, which is what everyone is talking about, are up 59 percent year over year when the industry fell by one-quarter of 1 percent. It is important to note that the sales base Tesla is building off is very small, so to increase sales by 59 percent is not that hard for a young company.

Earnings per share, on the other hand, do not look good at all, falling 235 percent year over year for the past 12 months compared with the industry decline of 42.2 percent.

It is important for a new car company — or any new company — to have staying power. What I mean is a strong balance sheet and, unfortunately, that is not what I found with Tesla.

Its current ratio of 1.5 is good when compared with the industry average of 1.3. But that is where the good news ends for the financial strength of Tesla. The debt to equity is almost 300 percent, coming in at 273 percent.

The car industry is high-debt; however, the average debt to equity is only 181 percent. When I'm investing in companies, I like to be more conservative and have my companies have less debt to equity than the average.

You now know that Tesla is losing money, so it should be no surprise that the return on equity is a negative 37 percent versus a positive 11 percent for the industry.

Tesla cars are not cheap. They cost $70,000 to $105,000. Even with these prices, the company is losing 9 cents for every dollar it brings in — not what an investor would hope for.

The store concept for Tesla Motors seems to be working pretty well: The receivable turnover in the last 12 months shows 23.2 times for the company versus five times for the industry average. Inventory turnover over the last 12 months does not look so attractive: 3.6 times for Tesla motors — roughly one-third the industry average turnover of 10.8 times for the past 12 months.

Looking forward, it is estimated that Tesla should have earnings per share of $2.10, based on the mean estimate calculated by seven analysts, by year ending December.

The company lost $2.36 per share for the year ending December 2014 and is estimated to lose $1.28 for the year ending December 2015.

I think it is also worth knowing that over the last four quarters, the company has missed the earnings estimates by a wide margin, the lowest being the September 2014 quarter when it missed the estimated by 50 percent. However, for the most recent quarter ending December 2014, the company missed the estimate by 105 percent.

The analysts were estimating earnings of 4 cents for the quarter, yet the company lost 86 cents for the quarter. It is also of concern that 90 days ago, for the year ending December 2016, the year-end estimate was $4.12 and is now nearly cut in half to $2.10.

Based on these numbers, investors are paying 91 times for earnings for this company with a large amount of rising debt. With Thompson Reuters, I can go out to December 2018 for the earnings estimates. While I think this is crazy because it is so far out, I still wanted to share with investors that the estimate of earnings for December 2018 is $7.98.

Before you get too excited, understand with the stock trading at current levels of about $190 per share, that forward PE is 24 times earnings. The S&P 500 now trades about 17 times earnings and investors are saying that is expensive. The question is how long investors will be willing to pay a high multiple for a company such as Tesla.

All great companies, including Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC) andCisco (Nasdaq: CSCO), traded for high multiples in the early stages. But as the company matured, it was expected to trade for a more reasonable multiple closer to the market. So I think it is very possible that come 2018, the best scenario for Tesla Motors is that the stock will be trading in a range of $150 to $250.

If I had room in my garage I would not mind having a Tesla. But I have neither the room nor the desire to put the stock in my clients’ portfolios.

Do you have a question or a company you would like us to take a look at?
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