TSLA Buy Recommendation October 2010


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It's October 2010. William Blazejeski is a doe eyed, bushy tailed senior at Stetson University about to present his semester long project to the Roland George Investment Program - the prestigious student run investment fund that utilizes real money for students to trade taken from the endowment. TSLA was $20.00 at the time. Not anymore!

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TSLA Buy Recommendation October 2010

  1. 1. Tesla Motors Buy Recommendation Purchase 1,700 Shares -William Blazejeski
  2. 2. Company Background • Founded in 2003 • Consumer Cyclical – Auto & Truck Manufacturer. • High performance EV’s (Electric Vehicles.) • The upcoming Model S. • Partnerships with Daimler, Toyota, and Panasonic. • Dynamic management. • NUMMI Plant.
  3. 3. Electric Vehicle Growth • EV’s are expected to represent 5-10% of new vehicle sales by 2020. • The U.S. is trying to reduce our dependency on foreign oil and the new “green” movement. • Incentives to purchase EV’s are provided by both State and Federal governments. • EV attempting to penetrate market. – Must overcome “Range Anxiety,” other worries.
  4. 4. Industry Overview • The auto industry has seen significant changes over the past two years. – GM & Chrysler Bankruptcy. – Tarnished view of the American Auto industry. • The “Cash for clunkers” program in 2009 temporarily artificially increased auto-sales in the U.S. – This explains a drop in auto-sales for 2010. • “The consumer is crawling back, particularly in the more affluent and higher-quality credit segments, which should provide upside to our 2011 (auto industry) outlook.” – Barclays Analyst • Consumers looking for “Greener” vehicles, with such vehicles expected to represent anywhere from 20% to 1/3 of Urban vehicles at the end of the decade.
  5. 5. Trading History Ticker Sector ROE P/E Recent Range TSLA Consumer Cyclical N/A N/A $34.50 $14.98 $3.24 -36.42 billion • Tesla went public June 29th, 2010 on the NASDAQ stock exchange under the symbol TSLA, with an IPO price of $17.00 – This was the first IPO of an American automaker since Ford in 1956. – Concurrent with the IPO, Tesla sold $50 million dollars worth of share to Toyota at the IPO price. Mkt Cap Beta 1.11 AvgVl Fair $ 924k $51.00
  6. 6. Recent News Affecting Share Price • On November 4th, Tesla’s biggest supplier of lithium ion batteries, Panasonic, purchased $30 million dollars worth of TSLA stock at $21.15 a share. This bumped their share price up to $25.00 per share. • Third quarter losses were less than what analysts had expected. This pushed the share price up further to over $30.00. – Later that week, rumors of a takeover by Ford briefly lead to significant buying on November 17th afternoon trading. • A Bloomberg report calculated that of 10.3 million dollar shares in float, about 6.6 million of which are shorted. TSLA 3-Month Stock Performance
  7. 7. Tesla’s EV Technology • Batteries are more efficient than competition. • Batteries are less expensive than competition. • Cylindrical cells as opposed to prismatic cells. • Commercial “laptop” batteries. • Patented liquid cooling technology. • In the future, more cost savings with the Model S through economies of scale. Note: The Roadster is currently the only vehicle on the market.
  8. 8. Tesla Models The Model S The Roadster
  9. 9. The Roadster • 0-60 MPH in 3.7 Seconds. • 231 Miles on a single charge. • $109,000 MSRP. • Zero emissions. • Over 1,200Roadsters are on the road in 28 different countries, with 6 million driving miles already clocked in.
  10. 10. The 2012 Model S • 160 - 300 mile range. • 0-60 MPH in 5.6 Seconds. • $57,400 MSRP.
  11. 11. The Tesla Designed Smart Fortwo • 85 mile range. • 3.5 hour charge. • Launch in 2012.
  12. 12. The Tesla Designed Toyota Rav4
  13. 13. Investment Points
  14. 14. The Model S • The model S will increase revenue from $0.1B (2010) to $1.8B by 2013. • It will compete in the Luxury Sedan Market. – At 18.5k vehicles produced in 2013, this represents only 2% of this market. • Over 2,800 reservations with $5,000 deposits already made and counting. Luxury Vehicle 2013 Estimated Market Share Acura RL BMW 5-Series Audi A6 Cadillac CTS infiniti M- Series Lexus GS460 Mercedes-Benz E-Class Tesla Model S
  15. 15. Earnings Estimates • Revenue will increase dramatically following the 2012 launch of the Model S, the next Roadster in 2013, and a new third vehicle sometime in 2015.
  16. 16. Management • Elon Musk (CEO) – Co-founded Tesla in 2003 • Also co-founder of PayPal, chairman of SolarCity, and CEO of SpaceX. Holds engineering and business degrees from U-Penn. • Deepak Ahuja (CFO) – CFO of Ford South Africa 2003-2006 • John Walker (VP, North America Sales & Marketing) – Over 15 years with Audi. • Gilbert Passin (VP, Manufacturing) – Held high positions in Toyota Manufacturing. Also held manufacturing positions with Volvo and Mack Trucks. • George Blankenship (VP, Design and store development) – Oversaw the growth of over 250 retail stores worldwide each year while with the Gap. Created the retail growth strategy that has made “The Apple Store” one of the greatest retail success stories in corporate history.
  17. 17. Other Investment Points • Tesla’s battery technology is by far the best in the industry. • Tesla recently purchased the former New United Motors Manufacturing (NUMMI) plant for $42 million dollars. – This plant has the capability of producing up to 500k vehicles annually and is only 20 miles away from their company headquarters in Palo Alto, California. Tesla is now retrofitting the facility for production of the Model S. • Tesla owns and operates all of their own dealerships. – More control over brand image and higher operating margins. • Tesla’s technology is 2-3 years head of competitors. • Investments from Toyota, Daimler, and Panasonic confirm the company’s legitimacy. – Investments of $50 million, $50 million, and $30 million, respectively.
  18. 18. Financials • Earnings – Tesla is currently gearing up for the production and launch of their flagship Model S vehicle. EPS have been negative this year and are projected to be (1.38) at year end. Positive EPS are not expected until 2013. • Cash flow – Capital expenditures during the next three years will be high as manufacturing lines and other equipment necessary for the Model S are laid out. Cash will remain in outflow until 2013. • Revenue – Currently, about 85% of revenue comes from vehicle and option sales, while the other 15% comes from powertrain, component, and related sales. • The Department of Energy loan – The DOE will extend a loan totaling $465million dollars to Tesla at a 3% interest rate for the company to develop and produce electric vehicles.
  19. 19. Valuation Multi-stage residual income model. Two-stage free cash flow model. Averaging the result of the two models, I came up with a fair value of $50.87.
  20. 20. Investment Risks • Any delays in the design, manufacture, launch and financing of the Model S will incur more costs for the company. • Consumers must be willing to accept this new technology. • Tesla is ahead of the game with regard to EV technology, and must stay this way in order to maintain their competitive edge. • Supplier dependency. – This may become less of an issue with Model S. – Investment from Panasonic is good news for Tesla.
  21. 21. Recommendation • There are currently no other U.S. auto manufacturing companies completely dedicated to the development of Electric Vehicles. This is a blossoming industry, and there are many factors that make me believe now is the time to invest in this industry. • Tesla’s stock is currently undervalued. • I recommend the Roland George Investment program purchase 1,700 shares of TSLA.