Tesla's ZEV Credits to Fall

Zacks Equity Research
April 8, 2014

Tesla Motors, Inc. (TSLA) will receive lower zero-emission vehicle (:ZEV) credits for its Model S cars from California as the state has altered its zero-emission vehicle program. California's Air Resources Board revealed that the company will receive only 4 ZEV credits per Model S sold in California and some other states, compared with 7 credits received last year.

The reduction in Tesla’s credits results from its inability to meet the rapid-refueling requirement, which requires cars to be refueled within 15 minutes or less. Tesla’s battery packs take a long time to charge, thus making Model S a Type III ZEV. The change in rule will be implemented after a public review period.

The move will hurt Tesla’s bottom line as the company struggles to attain profitability despite rising sales. The electric carmaker had received $129.8 million from the sale of ZEV credits in 2013. In fact, the company generated 9.7% of its annual revenues or $194.4 million from sales of ZEV and the U.S. Corporate Average Fuel Efficiency credits in 2013. It is the leading seller of California ZEV credits.

Nevertheless, Tesla is planning to open battery-swap stations, which will allow car owners to exchange depleted battery packs with fully charged ones. Once this is put into effect, the company will likely receive more ZEV credits per car.

According to CEO and co-founder Elon Musk, Tesla’s earnings from ZEV credit sales will also diminish due to increasing export of California-built cars to markets like Europe and Asia.

Tesla sells its ZEV credits to other automakers to help them meet California's Air Resources Board’s emission rules, which necessitate the sale of 1.4 million low-pollution plug-in hybrids, battery-powered autos and hydrogen fuel cell vehicles per annum by the mid 2020s. Tesla is not yet large enough to qualify for this rule.

Tesla currently carries a Zacks Rank #1 (Strong Buy). Some other automobile stocks worth considering are Tata Motors Ltd (TTM), Toyota Motor Corp. (TM) and Daimler AG (DDAIF). Tata Motors and Daimler sport a Zacks Rank #1, while Toyota holds a Zacks Rank #2 (Buy).

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