st. john s university graduate student managed … analysis of competitive forces – porter’s 5...
TRANSCRIPT
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St. John’s University
Graduate Student Managed Investment Fund
Presents:
Tesla Motors, Inc.: TSLA
Analysts: Rutvig Bhatt ([email protected])
Yanchen Liu ([email protected])
Gaoting Liu ([email protected])
Kevin Shanker ([email protected])
Share Data:
Fundamentals:
Price 5/7/14: $201.35 GAAP EPS (FY Dec’13): -0.62
Market Cap: $24.80B E[EPS2015]: 1.83
52 Week Range: $63.69 – $265.00 Beta: 1.10
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Contents
1. Executive Summary……………………………………………………3
2. Company Overview……………………………………………………3
3. Industry Analysis………………………………………………………8
3.1 Industry Overview…………………………………………………9
3.2 Analysis of Competitive Forces – Porter’s 5 Forces………………9
4. Fundamental Analysis………………………………………………..11
5. EPS Forecast………………………………………………………….24
6. Relative Valuation Model…………………………………………….29
7. Absolute Valuation…………………………………………………...32
8. Risk Factors…………………………………………………………..35
9. Conclusion and Recommendation……………………………………38
Reference………………………………………………………………..39
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1. Executive Summary
BUY recommendation based on our relative valuation model, EPS forecast, and
absolute valuation model (for 7% or higher constant growth rate) :
The average price estimate is $294.98，compared to the current stock price of $189 as
of 5/13/14 . It shows that Tesla is undervalued. According to our result of absolute
valuation model, Tesla can be priced between $92.88 and $304.87, depending upon
the constant growth rate of free cash flows after 2022. A growth rate of around 7.5%
makes the stock fairly valued now, where the current price of Tesla is $189. As
Tesla is relatively new company and expectation of higher growth rate is reasonable
we believe Tesla can grow 50% or more after 2022. Therefore, from absolute
valuation model we believe that there is still opportunity to BUY Tesla.
Upward trend of financial position: According to financial analysis, Tesla has a
good condition and accelerating revenue growth based on the annual growth rates of
the last 4 years. Tesla’s liquidity is on par with industry average.
2. Company Overview
“Gallons of Light”
Tesla Motors was incorporated in July 2003. Tesla Motors, Inc. (Tesla) designs,
develops, manufactures and sells electric vehicles and advanced electric vehicle
powertrain components. Tesla owns its sales and service network. Tesla began regular
production of its first fully electric and index award winning car, The Roadster, in
2008. Soon after their first launch, Advertising Age named Tesla one of America’s
Hottest Brands of the US. In addition to producing a federally-compliant electric
vehicle, the Roadster, the Company is also engaged in developing its Model S and
future vehicle manufacturing capabilities at the Tesla Factory. The company is
designing, developing and manufacturing lithium-ion battery packs, electric motors,
gearboxes and components both for its vehicles and for its original equipment
manufacturer customers. These activities occur at its electric powertrain
manufacturing facility in Palo Alto, California and at the Tesla Factory currently in
California, Giga factory will be in AZ, NV, NM or TX. The Company provides
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services for the development of electric powertrain components and sells electric
powertrain components to other automotive manufacturers.
On 29 January 2010, Tesla Motors filed Form S-1 with the U.S. Securities and
Exchange Commission, as a preliminary prospectus indicating its intention to file an
initial public offering (IPO) underwritten by Goldman Sachs, Morgan Stanley, J. P.
Morgan, and Deutsche Bank Securities. On May 21, 2010, Tesla announced a
"strategic partnership" with Toyota, which agreed to purchase US$50 million in Tesla
common stock issued in a private placement to close immediately after the IPO.
Executives at both companies said that they would cooperate on "the development of
electric vehicles, parts, and production system and engineering support." Less than
two months later, Toyota and Tesla confirmed that their first platform collaboration
would be to build an electric version of the RAV4 EV. On June 29, 2010 Tesla Motors
launched its initial public offering on NASDAQ. The IPO raised US$226 million at
$17 per share for the company. It was the first American car-maker to go public since
the Ford Motor Company had its IPO in 1956.
Model S
The Model S was announced in a press release on June 30, 2008. Retail
deliveries began in the U.S. in June 2012, in Europe on August 2013 and in China in
April 2014. The United States Environmental Protection Agency range for the 85
kW·h battery pack model, the first time launched in the United States market, is 265
mi (426 km), and 208 mi (335 km) for the model with the 60 kW·h battery. It also
includes a mobile charger, which can be used with the regular plug in and can charge
up to 26 miles per hour.
In October 2011, Tesla reached 6,500 reservations for the Model S for
delivery beginning in June 2012. Tesla expects global sales of 35,000 units in 2014, a
55% increase over 2013, with combined sales in Europe and Asia expected to be
almost twice that of North America by the end of 2014. Sales in Europe and North
America totaled 22,477 units in 2013, surpassing Tesla's annual sales target of 21,500
units. Global sales reached over 25,000 units through December 2013, with the
United States as the leading market with about 20,600 units sold through December
2013. Sales in the American market during 2013 totaled about 20,600 units allowing
the Model S to rank in 2013 as the third top selling plug-in electric car in the U.S.
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Also in 2013, the Model S was the top selling car in the full-size luxury sedan
category in the U.S., ahead of the Mercedes-Benz S-Class (13,303), the top selling car
in the category in 2012, and also surpassing the BMW 7 Series (10,932), Lexus LS
(10,727), Audi A8 (6,300) and Porsche Panamera (5,421).
Among other awards, the Model S won the 2013 "Motor Trend Car of the Year",
the 2013 "World Green Car", Automobile Magazine's 2013 "Car of the Year", and
Time Magazine Best 25 Inventions of the Year 2012 award.
Super Charger Network
In 2012, Tesla Motors began building a network of 480-volt fast charging
Supercharger stations to facilitate longer distance journeys in the Model S. As of
April 2014, there are 89 stations operating in the United States and 16 in Europe. The
initial network was planned to be available in high-traffic corridors across North
America, followed by networks in Europe and Asia in the second half of 2013. The
first Supercharger corridor in the U.S. opened with free access in October 2012.
The Supercharger is a proprietary direct current (DC) rapid-charging station
that provides almost 120 kW of power, giving the 85 kWh Model S an additional 150
miles (240 km) of range in about 20 minutes, or 200 miles (320 km) of range in about
30 minutes. The electricity used by the Supercharger in the West Coast corridor
comes from a solar carport system provided by SolarCity. Eventually, all
Supercharger stations are to be supplied by solar power. The network is exclusive to
compatible Model S sedans. Supercharging hardware is standard on Model S vehicles
equipped with an 85 kWh battery and optional on Model S vehicles equipped with a
60 kWh battery. The Roadster is not equipped to charge from the Superchargers, but
according to the automaker, all future Tesla models will be.
Battery Swapping
Tesla designed its Model S to allow fast battery swapping. This feature
facilitated the assembly process. In June 2013, Tesla announced their goal to deploy a
battery swapping station in each of its stations. Elon Musk, chairman and CEO of
TESLA, demonstrated a 90-second battery swap operation. Model S is designed to
allow a fast battery swap, exchanging your battery for a fully charged battery in less
than half the time it takes to refill a gas tank. Each station will initially have about 50
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batteries available and will not require reservations. The service would be offered for
the price of about 15 US gallons of gasoline. Owners can pick up their original battery
pack fully charged on the return trip for the same price as the pack swap. Tesla would
also offer the option to keep the pack received in the swap for the difference in price
if the battery received is newer. Alternately, Tesla would return the original pack for a
transport fee.
Giga Factory
As Tesla reaches for its goal of producing a mass market electric car in
approximately three years, they have an opportunity to leverage their projected demand
for lithium ion batteries to reduce their cost faster than previously thought possible. In
cooperation with strategic battery manufacturing partners, they are planning to build a
large scale factory that will allow them to achieve economies of scale and minimize
costs through innovative manufacturing, reduction of logistics waste, optimization of
co-located processes and reduced overhead.
The Gigafactory is designed to reduce cell costs much faster than the status quo
and, by 2020, produce more lithium ion batteries annually than were produced
worldwide in 2013. By the end of the first year of volume production of Tesla’s mass
market vehicle, they expect the Gigafactory will have driven down the per kWh cost of
their battery pack by more than 30 percent.
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Target for next 10 years:
2014: 50,000 Model S sales including Asia and right-hand drive countries; 5,000
Model X sales; Supercharger network covering 75% of population in the developed
world. They have opened 2 new stores since the presentation. Here they have
showed their plan for 2014 http://www.teslamotors.com/supercharger]; limited
battery-swap stations open.
2015: Q1 Model E prototype revealed; All wheel drive Model S revealed;
Supercharger network mostly built out; Tesla/Panasonic battery giga-factory
announced; 70,000 Model S sales; 40,000 Model X sales.
2016: Improved battery pack options for Model S and X - range up to 500 miles;
giga-factory opens; Superchargers upgraded to 200 kw; 90,000 Model S sales;
80,000 Model X sales.
2017: Model Y (GenIII crossover) prototype released; Model S mid-cycle refresh
designs released; Mercedes adds more Tesla-built drivetrains to their line-up of cars;
50,000 Model E sales; 100,000 Model S and 90,000 Model X sales.
2018: Autopilot feature rolls out; announcement of new auto factory to be built in
Europe; Superchargers upgraded to 250 kw; 150,000 Model E sales; 100,000
Model S sales; 90,000 Model X sales.
2019: Elon retires as Tesla CEO but remains Chairman; Model R (roadster) and
Model Z (exotic) prototypes released using GenIII platform; European factory
opens; Toyota adds Tesla-built drivetrains to their line-up; 2nd battery gigafactory
to be built in Asia; Model X mid-cycle design refresh; 400,000 Model E; 50,000
Model Y; 110,000 Model S; 100,000 Model X.
2020: Model S 2.0 prototype released; 2nd gigafactory opens; GM begins to use
Tesla-built drivetrains in their cars; 2 new auto factories announced - 1 in U.S. and 1
in Asia; Superchargers now get 50% charge in 5 minutes; 750,000 Model E;
200,000 Model Y; 120,000 Model S; 110,000 Model X.
2021: Model P (GenIII platform) pick-up truck and Model L (large pick-up truck)
prototypes released; 2 new factories opened; Model E mid-cycle design updates
released; improved battery pack options for all models extend range; 1.3 million
Model E; 800,000 Model Y; 120,000 Model S; 110,000 Model X; 25,000 Model R;
1,000 Model Z.
2022: Most automakers are now using Tesla-built drivetrains and they pay Tesla so
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that these cars can access the Tesla Supercharger network. Tesla has added
hundreds of stations to accommodate mass adoption; 3 more auto factories and 3
more battery giga-factories are announced spread between U.S., Europe and Asia;
Gen IV platform announced with the Model C (compact) prototype being released.
Model C will sell for $25,000. Tesla sells millions of cars with margins double the
average automaker due to direct sales model and zero marketing budget. Tesla is the
#1 supplier of fleet cars for taxis, police, delivery vehicles, etc.
Company Executive List:
Elon R. Musk Chairman & Chief Executive Office
Deepak Ahuja Chief Financial Office
Jay Vijayan Chief Information Officer
Jeffrey B. Straubel Chief Technology Officer
Diarmuid O'Connell Vice President-Business Development
3. Industry Analysis
3.1 Overview
The United States has one of the largest automobile markets in the world.
Many large international automakers, such as Toyota, Kia, Daimler, Volkswagen, also
have U.S. manufacturing facilities. The auto manufacturing industry is considered to
be highly capital and labor intensive and is a relatively mature industry. The labor,
materials, and advertising are the major costs for producing and selling automobiles.
Original Equipment Manufacturer (OEMs), replacement parts production and
distribution, and rubber fabrication are the major areas of auto parts manufacturing.
According to WSJ report: “ U.S. auto sales bloom in April 2014, consumers
shrugged off concerns about the tepid economy and continued streaming into U.S.
auto dealerships, helping most car makers post higher new-vehicle sales.”
According to the latest report published in April 2014 by First Research, a
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leading provider of industry intelligence tools and analysis, “the global revenue of the
automobile manufacturing industry has surpassed $2 trillion annually. The US
industry includes 200 companies with combined annual revenue of about $220
billion.” The profitability of companies in this industry depends on manufacturing
efficiency, product quality, and effective marketing. Large companies have economies
of scale in sales and marketing and other companies in this segment such as Tesla
compete by focusing on specialized markets.
Main challenges faced by US auto manufacturers over the past decade include
high gas prices, high cost structure, few small-size car offerings, suffering from
import competition (especially the Detroit three: GM, Chrysler, and Ford), and low
consumer demand. The combined effects of these challenges drove big US
automakers Chrysler and GM into bankruptcy. As a result of the big auto bailout in
2008-2009, billions of dollar of loans received from the US and Canadian
governments, helped these automakers restructure their debts.
For global automotive industry, according to research from MarketLine: “The
global automotive industry involves the manufacture and sales of automobiles and
other retail activities, such as gas-station retail and the sale of car parts. The industry’s
yearly growth rate is expected to exceed 5.5% from 2010 to 2015, reaching a value of
more than $5.1 trillion by 2015.”
3.2 Analysis of Competitive Forces – Porter’s 5 Forces (electric cars segment)
Threat of Substitutes
Tesla is running a moderately medium threat from substitutes. Other than cars,
substitutes for travel include taking buses, planes, trains, walking and or bicycling.
Depending on the location some places have high availability of public transportation
while other may not. The threat to substitute depends on the availability of substitutes
in that specific area.
New Entrants Threat
Threat of new entrants is low in the industry since there are very few vehicles
competing in the electric car sector, and capital requirement and research and
development expense in battery area are high. Tesla’s collaboration with various auto
manufacturers such as Toyota also minimizes the threat of new entrants. Barriers to
entry include advanced technology and high capital investment.
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Intensity of Rivalry
Competition is medium to high since many companies have their hybrid car models
and there is a high entry barrier. This segment is very innovation driven and there is a
high potential for new products but barriers to entry are very high and exit barriers are
high too. Industry rivals to Tesla cars include hybrid cars, low mileage diesel cars.
Buyer Power
Customer's bargaining power is low if they are intent on owning a luxury
electric-powered vehicle. But, because the customer has other options such as
hybrids, high mpg diesel cars, and more efficient regular gasoline-powered cars,
overall bargaining power can be assessed as high. Even though the social trend
towards having a green environment may limit the buyer's bargaining power,
customer can walk away and buy something cheaper and more convenient to use
instead of Tesla’s luxury item.
Supplier's Power
Supplier power is currently medium. The main component of an electric car provided
by suppliers is generally the battery. In Tesla, the batteries are provided by Panasonic.
In order to lower its reliance on battery manufacturers, Tesla plans to build its own
battery company in the future. Engine and transmission components are built in-house
while chassis and engineering components are provided by Lotus. Firms in the
industry such as Tesla are moving towards vertical integration.
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4. Fundamental Analysis
In this part, the comparables we use throughout this section consist of Tesla, Ford,
General Motors, and Volkswagen AG. In the industry average, it consists of TSLA,
KIA, Daimler AG, Volkswagen AG, General Motor, Toyota Motors, and Ford.
Financial Ratios Analysis
Profitability Margins
EBIT Margin
EBIT Margin measures the operating profitability of a company, and stands
for how much of each sales one dollar is left after operating expenses are accounted
for. Tesla experienced a big drop from 2009 to 2010, and kept an upward trend since
then. But it’s still negative and a little bit lower than its competitors and the industry
average.
2009 2010 2011 2012 2013
TESLA -46.36 -125.78 -123.13 -95.41 -3.04
FORD 3.75 10.05 8.57 5.14 3.96
General Motors -19.27 3.75 4.12 3.14 5.26
Volkswagen AG -1.22 3.57 5.94 5.26 4.49
Industry Avg -9.37 -12.98 -12.81 -9.02 4.76
-140.00
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
20.00
EBIT Margin%
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Net Profit Margin
Net profit margin measures how much of each sales one dollar is left after all
expenses are accounted for. Tesla’s net profit margin is another margin that convinced
us that the company has the potential ability to keep increasing and do better in the
future. As we can see from the chart, Tesla’s net profit margin has a significant
increase from 2012 to 2013. Although the data for Tesla is negative, it has an upward
trend since 2010 and Tesla is such a new company, which need to spend a lot of
money on its research and development expense. So we have enough confidence to
believe that Tesla’s profit margin will keep growing in the future.
2009 2010 2011 2012 2013
TESLA -49.76 -132.17 -124.56 -95.87 -3.68
FORD 2.29 5.09 14.83 4.22 4.87
General Motors 100.22 4.55 6.12 4.06 3.44
Volkswagen AG 0.91 5.39 9.67 11.27 4.60
Industry Avg 7.10 -14.83 -11.38 -8.47 4.35
-150.00
-100.00
-50.00
0.00
50.00
100.00
150.00
Net Profit Margin%
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ROE
ROE measures the amount of net income as a percentage of shareholders
equity. Return on equity measures a corporation’s profitability by revealing how
much profit a company generates with the money shareholders have invested. The
ROE trend for Tesla is just like the ratios that we saw in the previous charts, with the
notable improvement from 2012 to 2013. Also, the data of Tesla is negative, as we
mentioned before, Tesla is a new company and is focused on electric cars, so it will
take one year or more to see the company turn to profitability. The ROE of Tesla’s
competitors, Ford, GM, and Volkswagen AG decreased from 2012 to 2013 while
Tesla had a significant increase. So we believe that Tesla has outperformed than its
competitors and has a good investment condition.
2009 2010 2011 2012 2013
TESLA -59.50 -62.78 -118.03 -227.22 -18.69
FORD 0 0 281.62 36.58 33.81
General Motors 0.00 19.16 24.73 16.64 13.56
Volkswagen AG 2.73 16.82 29.77 32.11 10.96
Industry Avg 0.98 16.84 38.00 -13.51 12.93
-300.00
-200.00
-100.00
0.00
100.00
200.00
300.00
400.00
ROE
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ROA
Return on asset measures how efficient management is using its assets to
generate net income. Tesla experienced a little decrease from 2009 to 2011, then had
a significant increase from 2012 to 2013. Also, it is below its peers and industry
average because they have yet to become profitable.
2009 2010 2011 2012 2013
TESLA -29.15 -43.06 -46.28 -43.36 -4.19
FORD 1.31 3.65 11.78 3.07 3.65
General Motors 0.92 0.04 0.06 0.04 0.03
Volkswagen AG 0.56 3.63 6.80 7.71 2.86
Industry Avg 0.28 4.45 -0.68 -1.37 3.72
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
ROA
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Short Term Solvency
Current Ratio
Current ratio measures how well the company would be able to pay its short
term obligations with its short term assets. The higher the ratio, the more capable the
company is of paying its obligations on demand. Tesla’s current ratio was above
industry average in 2010, 2011, and 2013. Also, for most years, Tesla’s current ratio
is above 1, which can tell us the company had a relatively stable ability to pay back its
short term liabilities with its short term assets.
2008 2009 2010 2011 2012 2013
TESLA 0.36 0.00 2.76 1.95 0.97 1.87
FORD 1.33 2.62 2.43 2.39 2.34 1.78
General Motors 0.59 1.13 1.15 1.23 1.26 1.31
Volkswagen AG 1.18 1.12 1.12 1.04 1.11 1.07
Industry Avg 1.08 1.39 1.51 1.39 1.28 1.36
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Current Ratio
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Quick Ratio 2
Quick ratio 2 measures the company’s ability to pay short term obligations with its
most liquid short term assets. Tesla’s quick ratio 2 is above the industry average in
2010, 2011, and 2013. So we can believe that Tesla has a good ability to pay its short
term obligations with its most liquid short term assets.
2008 2009 2010 2011 2012 2013
TESLA 0.14 0.00 2.10 1.64 0.46 1.33
FORD 1.25 2.51 2.31 2.27 2.1985 1.67
General Motors 0.30 0.84 0.79 0.85 0.79 0.85
Volkswagen AG 0.82 0.87 0.89 0.77 0.80 0.79
Industry Avg 0.60 0.93 1.19 1.10 0.93 1.03
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quick Ratio 2
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Operating Efficiency
Receivables Turnover
Receivables turnover measures how quickly the company collects on its credit
sales with the assumption of all sales are credit sales. As we can see from the chart,
Tesla’s receivable turnover is above industry average and its competitors. This maybe
not a good ratio for car companies, since when customers buy cars “on credit”, they
usually borrow the money from their bank or from the finance arm of the car
company, so it may not show as a receivable on the car manufacturers Balance Sheet.
2009 2010 2011 2012 2013
TESLA 32.88 22.89 25.14 22.72 53.02
FORD 1.29 1.59 1.75 1.67 1.73
General Motors 13.55 16.72 16.12 12.49 8.34
Volkswagen AG 2.74 3.18 3.37 3.61 3.48
Industry Avg 4.33 5.02 8.10 9.47 13.22
0.00
10.00
20.00
30.00
40.00
50.00
60.00
Receivables Turnover
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Asset Turnover
Asset turnover measures a firm’s efficiency at using its assets in generating
sales or revenue. Tesla’s asset turnover was below industry average from 2009 to
2012, but it had a significant increase above industry average in 2013. Furthermore,
Tesla’s asset turnover has had an upward trend since 2010. So we can expect that
Tesla’s asset turnover will keep increasing in the future, and Tesla has a good
efficiency at using its assets in generating sales and revenue.
2009 2010 2011 2012 2013
TESLA 0.585 0.326 0.372 0.452 1.140
FORD 0.573 0.717 0.794 0.728 0.748
General Motors 0.918 0.983 1.060 1.036 0.984
Volkswagen AG 0.610 0.674 0.703 0.684 0.622
Industry Avg 0.702 0.894 0.825 0.838 0.897
0.000
0.200
0.400
0.600
0.800
1.000
1.200
Asset Turnover
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Inventory Turnover
Inventory turnover measures how fast the company moves or sells its
inventory. As we can see from the chart, Tesla has the lowest inventory turnover than
its competitors and industry average level. However, for electric cars, it is a new
emerging market, which needs time to be recognized and accepted by customers.
Manufacturers are making more environmentally friendly cars followed by consumer
demand and change in legislations. This trend is really important to electric car
companies such as Tesla as it provides more incentives for consumers to buy from
them, which will help them reduce their inventory.
2009 2010 2011 2012 2013
TESLA 5.13 2.51 2.99 2.41 5.11
FORD 13.51 17.48 18.24 16.53 16.11
General Motors 9.65 10.69 9.98 9.31 9.39
Volkswagen AG 5.50 6.74 5.85 5.66 5.70
Industry Avg 7.44 9.91 8.77 8.53 8.83
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Inventory Turnover
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Long Term Solvency
Long-Term Debt-to-Asset Ratio
Long-Term Debt-to-Asset Ratio indicates that what proportion of long-term
debt the company is using to finance its assets. We can see from the chart, Tesla’s
long-term debt-to-asset ratio had a big drop from 2008 to 2009. Since then, it was
well above the industry average in 2011 and 2012.
2008 2009 2010 2011 2012 2013
TESLA 107.19 13.95 18.73 38.01 36.93 24.78
FORD 41.33 58.88 53.76 45.90 45.09 37.93
General Motors 31.87 4.06 7.23 8.06 7.05 13.24
Volkswagen AG 19.81 20.88 18.64 17.51 20.55 18.97
Industry Avg 24.00 29.08 21.03 22.93 23.40 21.06
0.00
20.00
40.00
60.00
80.00
100.00
120.00
Long-Term Debt-to-Asset Ratio
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Financial Leverage (using average)
Financial leverage shows a company’s use of leverage of all types (debt +
liabilities). Tesla’s financial leverage was below industry average in 2009, 2010, 2011,
and 2012, and above the industry average in 2013.
DuPont Analysis of ROE
Using DuPont Analysis, ROE=net profit margin*asset turnover*financial leverage
(using averages). As we can see from the chart, Tesla has all negative ROE in the last
3 complete years. It tells us that the return to shareholders equity is negative,
declining significantly from 2011 to 2012 before improving in 2013. For net profit
margin factor, it had a significant increase from 2011 to 2013. For asset turnover
factor, it also had a big increase from 2011 to 2013. For financial leverage factor, it
increased from 2011 to 2012, and then dropped a little from 2012 to 2013. So, Tesla’s
financial leverage contributed to the worsening in ROE from 2011 to 2012, and then
2009 2010 2011 2012 2013
TESLA 2.06 1.46 2.55 5.24 4.46
FORD 0.00 0.00 23.90 11.91 9.27
General Motors 0.00 4.28 3.82 3.95 4.00
Volkswagen AG 4.91 4.63 4.38 4.17 3.83
Industry Avg 4.01 3.24 4.59 5.36 3.92
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Financial Leverage (using average)
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the decrease in financial leverage and the increase in the other two factors contributed
to the improvement in the ROE from 2012 to 2013.
2011 2012 2013
TESLA -118.03 -227.22 -18.69
-250.00
-200.00
-150.00
-100.00
-50.00
0.00
ROE
2011 2012 2013
TESLA -124.56 -95.87 -3.68
-140.00
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
Net Profit Margin%
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2011 2012 2013
TESLA 0.372 0.452 1.140
0.000
0.200
0.400
0.600
0.800
1.000
1.200
Asset Turnover
2011 2012 2013
TESLA 2.55 5.24 4.46
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Financial Leverage (using average)
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5. Earnings Forecast: Fiscal Year 2015
Pro Forma Income Statement
Competitive Industry Analysis
A pro forma income statement for FY 2015 was created to estimate future EPS
of Tesla for the fiscal year ending December 2015. Tesla’s performance in the
electric car market was compared against competitors in similar automotive markets
worldwide. Tesla currently sells automobiles in over 28 countries across the globe.
The industry comparison consists of six companies excluding Tesla in forecasting the
pro forma income statement for FY ending 2015. Due to similar marketing mix and
product offerings, these six companies were best suited for an industry comparison.
Company Country / Region
Kia Motor Corporation Korea
Toyota Motor Corporation Japan
Ford United States
General Motors United States
Volkswagen AG Germany
Daimler AG Germany
Sales / Revenue FY 2015
It is anticipated that the “electric car market share will increase from .62% to 1.50%
of total automotive market share from 2013 to 2015” ("Tesla Needs To Capture 14%
U.S. Market Share To Justify Valuation."(TSLA). N.p., n.d. Web. 13 May 2014).
Tesla’s market share as compared to the total competitive industry for 2013 is .1968%
and is projected to increase by 35% of the total electric car market share with total
revenue anticipated to increase from $2,013.50 in 2013 to $5,871.1 by 2015. Tesla
Motors (TSLA) has expanded its operations to China, the world’s largest passenger
car market. On April 22, Tesla’s Model S units were delivered to Chinese customers,
priced at USD $121k. Tesla aims to sell at least 5,000 cars by the end of 2014 in the
Chinese market. According to an analysis by Mckinsey, “China is expected to
25
contribute about 35% of the worldwide growth in revenues from passenger car sales
from 2011 through 2020.” Tesla currently sells 50% of electric vehicles worldwide
and is expected to capture only 35% of total market share of electric vehicle sales by
2015 due in part to increasing competition. Industry revenue for competitors
excluding Tesla was generated from the Estimates portion of FactSet. Total estimated
sales of competitors excluding Tesla are $1,112.43M or 99.475 percent of total
automobile sales. We expect Tesla to capture 35% of the total Electric Vehicle market
share (1.50%) or .525% by 2015.
Company Sales Est. FY '15 Total Market Share
General Motors Company 163,429.4 14.614%
Toyota Motor Corp. 268,333.5 23.995%
Daimler AG 186,484.0 16.676%
Ford Motor Company 149,433.2 13.362%
Volkswagen AG 295,014.1 26.380%
Tesla Motors, Inc. 5,871.1 0.525%
KIA Motors Corporation 49,738.6 4.448%
Comps Source: PERSONAL:/Comps/
Total 1,118,303.96 100.000%
Cost of Goods Sold & Depreciation & Amortization Expense FY 15
In order to estimate Cost of Goods sold along with depreciation and amortization
we analyzed Tesla’s current Property, Plant and Equipment (PP&E) data along with
the company’s Capital Expenditures to find a relative link between the two items. We
concluded that Capital Expenditures were directly related to PP&E as the year over
year increase to PP&E has been consistent with the inclusion of Capital Expenditures.
Tesla’s FY15 PP&E Gross is calculated by taking the PP&E Gross for 2013 and
adding estimated Capital Expenditures for FY14 and FY15 found in FactSet. As Tesla
noted the use of straight-line depreciation in their 10k, we applied the 8.28%
depreciation rate to the PP&E Gross for FY15. We arrived at 8.28% depreciation in
2013 by dividing the Depreciation total by the PPE-Gross. Applying the same
method to 2015 resulted in a depreciation amount of $189.25M. Since Tesla’s Bond
26
maturity occurs in 2018, we also applied a straight-line amortization schedule for
FY15. The Total Cost of Goods Sold including D&A is forecasted at $4,301.82M.
As a result Gross profit is equal to Total Revenue – Total Cost of Goods Sold
($5,871.10-$4,301.82=$1,569.27) in millions. We expect COGS excl. D&A as a % of
Revenue to decrease from 72.07% in 2013 to 70.00% in 2015, based on economies of
scale
SG&A Expense
Research & Development FY 2015
In forecasting the Research & Development costs associated with FY 2015, we
took into account the forecasted projection for Q2 & 2014, most recent data provided
by Tesla. There is an expected 30% increase in R & D due to geographic expansion in
Q2 2014 which we expect to decrease to 20% by 2015 bringing total R & D Expense
of 2015 to $392.04M. As Tesla is introducing new models in various markets, we
anticipate diminishing R & D as focus turns to sales.
Other SG&A FY 2015
Tesla Motors, Inc. has been able to grow revenues from $413.3M USD to
$2.0B USD in the span of one year from 2012 to 2013. In addition, the company has
been able to reduce the percentage of sales devoted to selling, general and
administrative costs from 36.39% to 14.18%. This led to an improvement from a loss
of $396.2M USD to a smaller loss of $74.0M. The current trend indicates as
revenues increase, total SG&A expense as a percentage of sales decreases year over
year. In recent news, Tesla has indicated a rise in SG&A margin over the next year of
roughly 14% in which we anticipate to carry forward in 2015.
Year Revenue COGS Exc. D&A
COGS Exc. D&A % of
Revenue Depreciation Amortization Total COGS
2007 0.07 0.01 12.33% -- -- 2.90
2008 14.74 11.73 79.54% -- -- 15.88
2009 111.94 95.47 85.28% -- -- 102.41
2010 116.74 75.39 64.58% -- -- 86.01
2011 204.24 125.73 61.56% -- -- 142.65
2012 413.26 354.36 85.75% -- -- 383.19
2013 2,013.50 1,451.15 72.07% 103.28 2.80 1,557.23
2015 5871.10 4109.77 70.00% 189.25 2.80 4301.82
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Interest Income FY 2015
In forecasting Tesla’s potential interest income we took to the balance sheet to
calculate the average interest yield from 2009 through 2013. By dividing the interest
income from each of the years 2009-2013, by the sum of all Cash & Short Term
Investment and Total Investments & Assets for the prior year, we estimated an
average yield of 0.09% annually. As per the 10k, we do not anticipate any “Other
Income”, as those presented in prior years are related to Foreign Exchange positions
and are said to be non-recurring items. Total expected Cash & Short Term
Investments from FactSet for 2014 is approximately $1,475.38M of which we applied
a 0.09% interest rate yield, resulting in an Interest income $1.33M for FY 2015.
YEAR R&D Other SG&A SGA, OP EXP
2006 25.00 4.82 29.82
2007 62.75 14.35 77.10
2008 53.71 23.65 77.36
2009 19.28 42.15 61.43
2010 93.00 84.57 177.57
2011 208.98 104.10 313.08
2012 273.98 150.37 424.35
2013 231.98 285.57 517.55
2015 392.04 821.95 1156.00
Year Int. Income Int. Yield
Dec '09 0.159 1.51%
Dec '10 0.258 0.09%
Dec '11 0.255 0.14%
Dec '12 0.288 0.09%
Dec '13 0.189 0.08%
Dec '15 1.33 1475.38
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Interest Expense 2015
Tesla currently maintains outstanding Long Term Debt (Bond Issuance) in the
amount of $586.3M with annual coupon rate at 1.50% fixed. The current bond
maturity is set at year 2018. With that said, the only interest expense paid annually, in
this case until 2015 are the coupon payments, 1.50% of the total $586.3M LTD. The
total amount of interest expense paid annually is $8.79M.
Income Tax FY 2015
Since realized tax rates for the last eight years have been negative due to a
negative EBT, we used statutory rate at 35%, 2015 tax rates are dependent on 2014
income tax rate to determine amount of losses carried forward from 2013.
Year
Tax
Rate
2006 -0.33%
2007 -0.14%
2008 -0.12%
2009 -0.05%
2010 -0.11%
2011 -0.19%
2012 -0.03%
2013 -3.62%
2015 35.00%
Forecasted EPS FY 2015
Currently, 123 million shares outstanding and forecasted to rise to 144 million as
per the Q2 & 2014 Outlook as of May 7, 2014. With this expected increase we have
forecasted EPS (diluted) forecast for Tesla FY 2015 at $1.83. (EPS = Net Income
available to common shareholders / Diluted Shares Outstanding)
Year LTD Total Rate Interest Expense
2015 586.3 1.5% 8.79
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6. Relative valuation
Relative valuation is a set of calculations done to estimate a company’s
relative value to other companies in the same industry. The general method is using a
comparable company’s P/E ratio, Tesla’s EPS forecast and adjustment factor to
calculate the company’s stock price. Since Tesla is a company in its early stages, the
available data is not enough for us to use the general formula.
Therefore, in our relative valuation model, we estimate Tesla’s stock price
based on following factors:
First, Tesla’s estimated sales per share ratio of 2015.
The second is competitors’ forward price to sales ratios at 2015 fiscal year end.
The last one is adjustment factor.
We multiply these three factors to use relative valuation method to compare
Tesla’s value to that of its comparables to determine its financial worth. We chose
Tesla’s 6 competitors-General Motors Company (GM), Ford Motor Company (F),
Volkswagen AG (VOW), Toyota Motor Corp.(TM), Daimler AG (DAI), and KIA
Motors Corporation (KIA), S&P 500 and the industry average as Tesla’s comparables,
and we obtained their price to sales ratios from 2010 to 2013.
Price to sales
Name 2013/12/31 2012/12/31 2011/12/31 2010/12/31
TSLA 9.175 9.330 14.038 21.497
GM 0.443 0.317 0.225 0.441
F 0.430 0.387 0.325 0.544
VOW 0.509 0.407 0.282 0.377
TM 0.754 0.536 0.475 0.553
DAI 0.593 0.397 0.317 0.548
KIA 0.495 0.510 0.601 0.493
Industry Average 1.771 1.698 2.323 3.493
S&P 500 1.600 1.270 1.170 1.310
Then, we calculated the year-by-year P/S to P/S relationships between Tesla and each
comparable. The result is shown as in following table.
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P/S to P/S MEAN MEDIAN
TSLA/GM 20.71 29.43 62.39 48.69 40.31 39.06
TSLA/F 21.32 24.14 43.24 39.51 32.05 31.82
TSLA/VOW 18.04 22.95 49.69 57.03 36.93 36.32
TSLA/TM 12.17 17.41 29.53 38.86 24.49 23.47
TSLA/DAI 15.47 23.49 44.27 39.25 30.62 31.37
TSLA/KIA 18.53 18.30 23.37 43.59 25.95 20.95
TSLA/Industry 5.18 5.50 6.04 6.15 5.72 5.77
TSLA/S&P500 5.73 7.35 12.00 16.41 10.37 9.67
We picked an appropriate Adjustment Factor for each of the comparable as is
shown in the table below.
Adjustment factor
General Motors Company
Ford Motor Company 20.00
12 17.00
Toyota Motor Corp. 14.00
Daimler AG 12.00
KIA Motors Corporation 13.00
Industry Average 18.00
S&P 500 5.00
The chart below displays competitors’ forward price to sales ratios of 2015.
P/S FY2015
General Motors Company 0.347
Ford Motor Company 0.421
Volkswagen AG 0.418
Toyota Motor Corp. 0.685
Daimler AG 0.520
KIA Motors Corporation 0.452
Industry Average 2.000
S&P 500 1.52
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From the former step we conclude that the sales per share ratio for FY2015
would be 40.77. Then, using the following formula: comparable P/S * adjustment
factor * estimated sales per share, we derived the price estimate for Tesla relative to
every competitor.
Relative Valuation P/S FY2 adj factor forward price(2015)
Tesla Motors, Inc. 4.347
General Motors Company 0.347 20.00 282.93
Ford Motor Company 0.421 17.00 291.79
Volkswagen AG 0.418 14.00 238.34
Toyota Motor Corp. 0.685 12.00 335.19
Daimler AG 0.520 13.00 275.37
KIA Motors Corporation 0.452 18.00 331.35
S&P 500 1.520 5.00 309.85
The average estimate price is 294.98. As of 5/13/2014, the stock price of Tesla was
$189. The relative valuation shows that Tesla is undervalued.
We recalculated the estimate price of Tesla using 7.5 as the adjustment factor and the
estimate price is $190.59, close to Tesla’s current price. Since the net revenue of Tesla
is growing year by year, the price to sales ratio might decrease. With a lower
adjustment factor, the estimate price is still on par with current price.
Relative Valuation P/S FY2 adj factor forward
price(2015)
Tesla Motors, Inc. 4.240
General Motors Company 0.347 7.50 106.103925
Ford Motor Company 0.421 7.50 128.731275
Volkswagen AG 0.418 7.50 127.81395
Toyota Motor Corp. 0.685 7.50 209.46
Daimler AG 0.520 7.50 159.003
KIA Motors Corporation 0.452 7.50 138.2103
S&P 500 1.520 7.50 464.778
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7. Absolute Valuation
Absolute valuation models try to determine company’s intrinsic worth based
on its projected cash flows. A business valuation model uses discounted cash flow
analysis to determine company’s financial worth. In general, Dividend Discount
Model is more popular than any other methods. However, Tesla is not paying any
dividends yet so we have used Free Cash Flow to Equity model with the assumption
that free cash flow will provide a fair representation of the potential values distributed
to the shareholders in future.
To discount the free cash flow we are applying three-stage growth. First stage
represents the growth based on their past performance which we expect to continue
for at least next 4 years. Tesla is still in growth stage of life cycle where along with
introducing new cars and improving current cars, they are highly focused on
developing the infrastructure (Tesla Stations and Gigafactory) which will greatly
benefit them in future. Keeping that in mind, unlike other companies, we are
expecting a higher growth rate after they will start producing batteries in their own
Gigafactory from 2018.
Cost of Capital (K)
As cost of capital can be calculated based on multiple assumptions and
multiple rates, we decided to calculate four different Ks to get better idea of cost of
capital:
CAPM:
Ri = Rf + βi (Rmkt - Rf)
Where,
Ri = Expected Return of the company
Rf = Risk Free Return
βi = Beta of company vs SPX
(Rmkt-Rf) = Market Risk Premium
The following table 1 shows the cost of capitals based on different input
assumptions. All the K’s use same Beta of 1.1, which is little higher than the average
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of raw and adjusted beta of last three years and last four years calculated on monthly
basis.
Cost Of Capital
10-year STRIPS 30-Year STRIPS
BB 10-year Monthly Market Return 10.692% 10.61%
Average of Market Excess Return '86-'13 12.1% 12.92%
Table 1
The CAPM model shows that the cost of capital of Tesla is between 10.61% and
12.10%. However, considering the fact that Tesla is new company in the industry and
investor’s expectations are higher from Tesla compare to any other mature companies,
we decided to use 12.10% as the cost of capital.
Free Cash Flow Forecast
Table 2 shows the calculation of company’s free cash flow from 2006 to 2015.
Dec
'15
Dec
'13
Dec
'12
Dec
'11
Dec
'10
Dec
'09
Dec
'08
Dec
'07
Dec
'06
Net Operating
Cash Flow 590.83 257.99 -266.08 -114.36 -127.82 -80.82 -52.41 -53.47 -3.42
Capital
Expenses -539 -264.22 -239.23 -197.9 -105.41 -11.88 -10.63 -9.80 -6.50
Net
Borrowing 0 21.70 173.254 204.42 71.51 -0.32 0.809 0 3
FCF to
Equity 51.83 15.47 -332.06 -107.84 -161.72 -93.03 -62.23 -63.27 -6.93
Table 2
FCFE from 2006 to 2013 are computed using actual numbers. Net operating cash
flow of 2015 is calculated by adding estimated non-cash expenses and change in
working capital to Net Income from the Income statement forecast. Change in
working capital is derived from the estimations of Factset professionals, backed out
from consensus means of Operation Cashflow and Depreciation and Amortization.
We forecast estimated free cash flow to equity in 3 different stages.
34
Stage 1:
For the first 3 years (i.e 2016-2018), we used a growth rate of 50%. We are
expecting a slower growth based on their estimation of completion of infrastructure.
They are expecting to develop sufficient number of Tesla stations in entire United
States by 2015 and then, we believe they will be highly focused on producing and
selling cars which will require more cash than what they are using currently. Based on
the growth rate of 50%, the estimated Free Cash Flows to equity till 2018 are given in
the table 3,
Growth Rate 2016 2017 2018
50% 77.745 116.680 174.926
Table 3
Stage 2:
Tesla is currently spending lots of resources on their Giga factory and it is expected
to start producing lithium ion batteries by 2019. By 2020, they are expecting to
produce more batteries in Giga-factory than batteries produced worldwide in 2013.
Gigafactory will have driven down the per kWh cost of their battery pack by more than
30 percent. Therefore, we are expecting increase in their FCFE to 100% for at least next
4 years. The estimated Free Cash Flows to equity from 2019 to 2022 are given in the
table 4,
Growth Rate 2019 2020 2021 2022
100% 349.85 699.71 1399.41 2798.82
Table 4
Stage 3:
We used the cost of capital (12.1%) from the CAPM Model part as our
discount rate; and we gave nine different growth rates (1% to 9%) as terminal growth
rates post 2022. We did scenario analysis using different cost of equities and terminal
growth rates to get a group of terminal values at the end of 2022. Based on which we
calculated the present value of all the cash flows after 2022 as of 2013.
35
Table 5 shows the present value of all the future cash flows after 2022 under
different growth rates:
K 1% 2% 3% 4% 5% 6% 7% 8% 9%
12.10% 9110.09 10111.21 11332.36 12855.02 14806.60 17398.05 21005.74 26373.29 35203.78
Table 5
Based on these three stages, we calculated the intrinsic value of Tesla, which is shown
in table 6,
1% 2% 3% 4% 5% 6% 7% 8% 9%
12.10% $92.88 $101.01 $110.93 $123.30 $139.16 $160.21 $189.21 $233.13 $304.87
Table 6
[Prof note: these tables are based on 123m shares instead of the 144m shares
used in the Income Statement]
As we can see here, based on the absolute analysis, Tesla can be priced between
$92.88 and $304.87, depending upon the constant growth rate. Specifically, the
stock is priced fairly now at $189 if FCFE grows at 50% per year from 2015 to 2018,
100% per year from 2018 to 2022, and then 7% after 2022. However, as Tesla is
relatively new company and expectation of higher growth rate is not unreasonable, we
believe Tesla can grow at 7% or more after 2022. Therefore, from this three stage
absolute valuation model we believe that there is still opportunity to BUY Tesla.
8. Risk factors
Market risk
The worldwide automotive market, particularly for alternative fuel vehicles, is
highly competitive today. It will probably become even more so in the future. Other
automobile manufacturers entered the electric vehicle market and there would be
additional competitors to enter this market.
Many established and new automobile manufacturers have entered or have
announced plans to enter the alternative fuel vehicle market. Mitsubishi has been
selling its fully electric iMiEV in Japan since April 2010 and Nissan has been selling
the fully electric Nissan Leaf since December 2010. In the past few years, Ford has
36
introduced the fully electric Ford Focus, and Fiat has introduced the Fiat 500e.
Moreover, BMW intends to introduce the fully electric BMW i3 in 2014 and
Volkswagen also plans to introduce its fully electric e-Golf. In addition, several
manufacturers, including General Motors, Toyota, Ford, and Honda, are each selling
hybrid vehicles, and certain of these manufacturers have announced plug-in versions
of their hybrid vehicles. For example, in December 2010, General Motors introduced
the Chevrolet Volt, which is a plug-in hybrid vehicle that operates purely on electric
power for a limited number of miles, at which time an internal combustion engine
engages to recharge the battery pack.
“If Tesla cannot keep up with changes in electric vehicle technology and, as a
result, may suffer a decline in competitive position which would materially and
adversely affect Tesla’s business, prospects, operating results and financial condition.”
[ citation?] As technologies change, Tesla plan to upgrade or adapt their existing
vehicles and introduce new models in order to continue to provide vehicles with the
latest technology, in particular battery cell technology.
In addition, Tesla’s future growth is dependent upon consumers’ willingness
to buy electric vehicles. If the government regulations and economic incentives
promoting fuel efficiency and alternate forms of energy, it probably could promote
the sales in electric cars. On the contrary, if the future regulation is going to promote
traditional car selling by a lower price of gasoline, it could bring negative influence
on Tesla’s performance.
Operation risk
“If Tesla is unable to sustain current level of production and deliveries of
Model S or increase production and deliveries in line with plans, both of which could
harm [Tesla’s] business.” [ citation?]
Their ability to sustain and grow production and deliveries for Model S is
subject to certain risks and uncertainties. Whether Tesla can sustain their production
and deliveries depends on following factors:
1. Suppliers are willing to deliver components on a timely basis and in the necessary
quantities, quality and at acceptable prices to produce Model S in volume and reach
their financial targets;
2. The distribution method should be efficiency. In March 2014, since New Jersey
37
blocks direct sales, Tesla had to close their 2 direct stores located in Short Hills and
Garden State Plaza. Tesla should adjust its business model to conform with local
regulation. Especially, now Tesla is expanding market overseas.
3. Tesla should be able to adequately respond in a timely manner to any problems
that may arise with their products.
4. “The equipment or tooling which they have purchased will be able to accurately
manufacture the vehicle.” [ citation?] Moreover, the information technology
systems that they are currently expanding and improving upon will be effective to
manage high volume production. [ citation]
Quality risk
“The long-term testing of quality, reliability and durability of Model S. are
ongoing and any negative results … could cause production or delivery delays, cost
increases or lower quality of … Model S vehicles”. [ citation?] However, the A
Tesla Model S electric car, touted as the safest car in America, caught fire last year.
The fire was caused by a large metallic object hitting the battery pack.
They have limited field experience with vehicles, especially Model S. there
can be no assurance that a field or testing failure of Model S or other battery packs
that Tesla produce will not occur, which could damage the vehicle or lead to personal
injury or death and may subject Tesla to lawsuits. They may have to recall vehicles
that contain this battery packs, and redesign battery packs, which would be time
consuming and expensive.
Supplier risk
The vast majority of which are single source suppliers, this may create
uncertainty. The supplier’s performance would influence the product price, quality
levels, and volumes. Consequently, it has impact on financial condition and operating
results.
Changes in business conditions, wars, governmental changes and other factors beyond
Tesla’s control or which they do not anticipate, could also affect suppliers’ ability to
deliver components on a timely basis.
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Cost risk
“The production costs for Model S were high initially due to start-up costs at
the Tesla Factory, manufacturing inefficiencies including low absorption of fixed
manufacturing costs, higher logistics costs due to the immaturity of … supply chain,
and higher initial prices for component parts during the initial period after the launch
and ramp of Model S.” [ citation] If Tesla is unable to reduce the manufacturing
costs of Model S or otherwise control the costs associated with operating business,
their financial condition and operating results will suffer.
Additionally, in the future they are willing to promote their vehicles through
the use of traditional media such as television, radio and print, thus, it makes cost
control more difficult. If Tesla is unable to keep operating costs at a lower level
comparing revenues they generate, their operating results, business will be harmed.
9. Conclusions and Recommendation
According to financial analysis, Tesla has a good condition and accelerating
growth based on the annual growth rates of the last 4 years. Tesla’s liquidity is on par
with industry average. According to our result of relative valuation model, Tesla is
undervalued. According to our result of absolute valuation model, Tesla can be priced
between $92.88 and $304.87, depending upon the constant growth rate, where the
current price of Tesla is $189. As Tesla is relatively new company and expectation of
higher growth rate is not reasonable, we believe Tesla can grow 7% or more after
2022. Therefore, from absolute valuation model we believe that there is still
opportunity to BUY Tesla. And our recommendation is to buy 100 shares of Tesla.
39
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