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Tesla Motors, Inc. (TSLA) Message Board

  • kpmgpartner54 kpmgpartner54 Jul 15, 2013 10:03 AM Flag

    New research not flattering cont.

    Global auto manufacturers currently have an average price/trailing sales ratio of 0.47x; TSLA is ascribed a 2.4x P/S multiple based on 2015 projected sales. In what is incontrovertibly both a cyclical and capital intensive industry, Partners won’t be surprised to know that auto makers possess a mediocre average Return on Invested Capital of 7.0%; sell side predicts TSLA’s ROIC will exceed 48% in 20156. Auto makers currently trade at average and median Forward P/E ratios of ~10x; TSLA trades at 29x 2015 EPS estimates. Sell-side appears to assume 345,000/year Gen 3 unit sales for the years beyond 2017 (a prototype of the car does not even exist yet), and a million plus units of an even cheaper model shortly thereafter. The numbers being thrown around for the even cheaper model would be the equivalent of outselling Infiniti, Audi, and BMW’s US sales combined, plus Porsche’s global sales, plus another 159,000 cars/year. Compare this to the 27,181 total plug-in Toyota Prius sales in all of 2012, which has a massive dealer network and is available in 80 countries. The logic of taking a niche, $100,000 ultra-luxury car and cutting the cost in half and that alone leading to a sales increase of at least 10x as many units is akin to asking why doesn’t Porsche sell a $45,000 car and allow themselves the potential to put one in the driveway of every Joe Sixpack? Porsche does indeed already have a ~$48,000 model called the Boxster and it only sold 10,126 units globally last year. Porsche’s total unit sales in 2012 were 143,096 (a record setting year) and they have five unique models, with many variations of each, e.g. a full 12 different types of Porsche 911s. By the looks of it, the market is estimating that TSLA’s pure EV line-up will not only outsell Porsche by several multiples within five years from today, but will do so with operating margins several percent higher than existing auto makers, and for this hyper-growth feat deserves to garner a price that values them not only as if all of the above is a foregone conclusion, but also quadruples the relevant ratios as compared to peers for good measure based on that certain future profitability and industry leading 48% ROIC.

    Observe that General Motors sold 9.36 million vehicles in the last twelve months and has an Enterprise Value of roughly $40 billion, compared to TSLA’s sales of 9,701 cars and EV of over $16 billion. TSLA raised $830 million (net to the company) dollars in a recent follow on equity offering and Convertible Note issuance. Proceeds were used to repay a DOE loan facility early that only charged interest rates of ~1.0% (substituting cheap financing for more expensive capital). Elon Musk took down almost $100 million of the most recent equity offering. When looking closer one realizes he did not actually come out of pocket with any cash personally for the shares, but instead took out an additional $150 million loan from the underwriters Goldman Sachs and Morgan Stanley, with his shares in the company as collateral (a la Aubrey McClendon), to buy the additional $100 million worth of shares, i.e. he actually cashed out $50 million. Note the circular reference of borrowing money secured by stock to buy more of that stock to support the price and how that resembles Chinese copper financing schemes (detailed by Southpaw’s managing partners as far back as 2011) more than the prudent actions of world class CEOs. He has done a great job of taunting the shorts via an endless stream of Tweets, buying himself time with capital raises, luring in retail investors and achieving the market cap goals necessary to exercise his Goliath-sized options package of another 5.27 million shares well ahead of the Board’s envisioned schedule. Incentives being the cornerstone of modern life that they are, we were compelled to analyze Musk’s option package and it would appear he is incented to issue as much equity as possible and produce as many cars as possible with no regard for cash flow or profitability.

    People generally neglect future competition when crafting bull theses that venture out several years, be it for Biotech companies with their nascent drug pipelines, new Gluten free food products available on the grocery store shelves, or in this case electric vehicles. The Chevy Volt (previous winner of European Car of the Year and Motor Trend’s “Car of the Year” accolades) and Nissan Leaf are not selling so well despite being at low and rapidly falling price points. Through the first six months of the year, annualized sales for the Volt, the top selling EV in the world, are 19,710 units. Time will tell if the cool factor of Tesla is enough to drive sales of a $40,000 EV to be 17x that of the Nissan Leaf (which cost half as much currently at as little as $21,300 after the $7,500 federal tax credit), Honda FIT or Chevy Volt. The Chevy Volt is estimated to cost $75,000 to build, yet retail MSRP is down to ~$30,000. The CEO of Fiat has publicly confirmed that the company will lose at least $10,000 for each sale of the 500e model EVs it just brought to market. 25% gross margins were a target previously promised by Musk that would be reached at the end of 2012 and has since been pushed back and enthusiastically restated for the end of 2013. Musk has not exactly been a McLuhanite with open and honest communication. If examined with any scrutiny at all his record reveals an unmistakable of pattern frequently over promising and spewing fundamentally misleading statements. Other risk factors and competition for Tesla vehicles include unforeseen technologies, Hydrogen powered cars (due out from Toyota and already out from Honda in SoCal), high efficiency diesels with competitive fuel efficiency and cost of ownership, the 100+ hybrids already available, the 30 other EVs currently already available and the few dozen more that are likely to hit the market within the next few years including the new higher-end Cadillac ELR and BMW i-series which are both due out in within months, not to mention the potential for declining gasoline costs over the coming years from all of this demand destruction. Total EV unit sales, divvied up among 31 different makes/models, in 2012 were estimated to be 139,9737 globally. TSLA not only needs the total EV market to increase 5-10 fold within four years to hit consensus projections, but they’d also then need to maintain a 29-58% market share of the overall EV market and go from negative gross margins to positive 12.5% EBIT margins in the process. In the words of that ugly Albanian guy who kidnapped Liam Neeson’s fictional daughter, “Good luck.” Having already rambled and ranted on far too much, for those few still reading we will leave out discussions on economic and logistical difficulties of the free charging for life network, the lack of available charging infrastructure for most people in big cities who park on the street or in parking garages, the battery swapping scheme, the Musk personally guaranteed Model S re-sale values, the lease financing deal and all of the subsequent liabilities and accounting obfuscations that each of these will cause.

    Shorting TSLA thus far has been a mistake and cost the fund over 1.5% in unrealized losses YTD. It is a mistake to short stocks where dreamers can apply nearly unlimited growth prospects to a company, which currently applies to almost everything. Even with such grave mistakes, we have managed to outperform the market on a gross basis by close to 1,000 basis points despite having only 50% net market exposure and below average concentration for a hedge fund. There are quite literally hundreds of other seemingly absurd situations out there that price in a lot of future growth (many much worse, obviously) and if we are to get involved in such situations we strive to try and use options to hedge and limit potential losses. At least in Tesla’s case the company is sustainable and its products are quite viable, it is just the stock price that may not be. We have viewed this short as a small off-setting pair trade against a much larger basket of auto parts suppliers, for which we are up an average of 81%. The biggest risk in the near term is the company crushing unit expectations and prolonging the hype-cycle until economic reality eventually sets in. This is proving to be yet another quintessential case study on reflexivity in the public equity arena.

    Global auto manufacturers currently have an average price/trailing sales ratio of 0.47x; TSLA is ascribed a 2.4x P/S multiple based on 2015 projected sales. In what is incontrovertibly both a cyclical and capital intensive industry, Partners won’t be surprised to know that auto makers possess a mediocre average Return on Invested Capital of 7.0%; sell side predicts TSLA’s ROIC will exceed 48% in 20156. Auto makers currently trade at average and median Forward P/E ratios of ~10x; TSLA trades at 29x 2015 EPS estimates. Sell-side appears to assume 345,000/year Gen 3 unit sales for the years beyond 2017 (a prototype of the car does not even exist yet), and a million plus units of an even cheaper model shortly thereafter. The numbers being thrown around for the even cheaper model would be the equivalent of outselling Infiniti, Audi, and BMW’s US sales combined, plus Porsche’s global sales, plus another 159,000 cars/year. Compare this to the 27,181 total plug-in Toyota Prius sales in all of 2012, which has a massive dealer network and is available in 80 countries. The logic of taking a niche, $100,000 ultra-luxury car and cutting the cost in half and that alone leading to a sales increase of at least 10x as many units is akin to asking why doesn’t Porsche sell a $45,000 car and allow themselves the potential to put one in the driveway of every Joe Sixpack? Porsche does indeed already have a ~$48,000 model called the Boxster and it only sold 10,126 units globally last year. Porsche’s total unit sales in 2012 were 143,096 (a record setting year) and they have five unique models, with many variations of each, e.g. a full 12 different types of Porsche 911s. By the looks of it, the market is estimating that TSLA’s pure EV line-up will not only outsell Porsche by several multiples within five years from today, but will do so with operating margins several percent higher than existing auto makers, and for this hyper-growth feat deserves to garner a price that values them not only as if all of the above is a foregone conclusion, but also quadruples the relevant ratios as compared to peers for good measure based on that certain future profitability and industry leading 48% ROIC.

    Observe that General Motors sold 9.36 million vehicles in the last twelve months and has an Enterprise Value of roughly $40 billion, compared to TSLA’s sales of 9,701 cars and EV of over $16 billion. TSLA raised $830 million (net to the company) dollars in a recent follow on equity offering and Convertible Note issuance. Proceeds were used to repay a DOE loan facility early that only charged interest rates of ~1.0% (substituting cheap financing for more expensive capital). Elon Musk took down almost $100 million of the most recent equity offering. When looking closer one realizes he did not actually come out of pocket with any cash personally for the shares, but instead took out an additional $150 million loan from the underwriters Goldman Sachs and Morgan Stanley, with his shares in the company as collateral (a la Aubrey McClendon), to buy the additional $100 million worth of shares, i.e. he actually cashed out $50 million. Note the circular reference of borrowing money secured by stock to buy more of that stock to support the price and how that resembles Chinese copper financing schemes (detailed by Southpaw’s managing partners as far back as 2011) more than the prudent actions of world class CEOs. He has done a great job of taunting the shorts via an endless stream of Tweets, buying himself time with capital raises, luring in retail investors and achieving the market cap goals necessary to exercise his Goliath-sized options package of another 5.27 million shares well ahead of the Board’s envisioned schedule. Incentives being the cornerstone of modern life that they are, we were compelled to analyze Musk’s option package and it would appear he is incented to issue as much equity as possible and produce as many cars as possible with no regard for cash flow or profitability.

    Global auto manufacturers currently have an average price/trailing sales ratio of 0.47x; TSLA is ascribed a 2.4x P/S multiple based on 2015 projected sales. In what is incontrovertibly both a cyclical and capital intensive industry, Partners won’t be surprised to know that auto makers possess a mediocre average Return on Invested Capital of 7.0%; sell side predicts TSLA’s ROIC will exceed 48% in 20156. Auto makers currently trade at average and median Forward P/E ratios of ~10x; TSLA trades at 29x 2015 EPS estimates. Sell-side appears to assume 345,000/year Gen 3 unit sales for the years beyond 2017 (a prototype of the car does not even exist yet), and a million plus units of an even cheaper model shortly thereafter. The numbers being thrown around for the even cheaper model would be the equivalent of outselling Infiniti, Audi, and BMW’s US sales combined, plus Porsche’s global sales, plus another 159,000 cars/year. Compare this to the 27,181 total plug-in Toyota Prius sales in all of 2012, which has a massive dealer network and is available in 80 countries. The logic of taking a niche, $100,000 ultra-luxury car and cutting the cost in half and that alone leading to a sales increase of at least 10x as many units is akin to asking why doesn’t Porsche sell a $45,000 car and allow themselves the potential to put one in the driveway of every Joe Sixpack? Porsche does indeed already have a ~$48,000 model called the Boxster and it only sold 10,126 units globally last year. Porsche’s total unit sales in 2012 were 143,096 (a record setting year) and they have five unique models, with many variations of each, e.g. a full 12 different types of Porsche 911s. By the looks of it, the market is estimating that TSLA’s pure EV line-up will not only outsell Porsche by several multiples within five years from today, but will do so with operating margins several percent higher than existing auto makers, and for this hyper-growth feat deserves to garner a price that values them not only as if all of the above is a foregone conclusion, but also quadruples the relevant ratios as compared to peers for good measure based on that certain future profitability and industry leading 48% ROIC

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