By Timothy Lutts, Chief Investment Officer and Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 5/14/12 Sign up for free Cabot Wealth advisory e-newsletter
I want to talk about my favorite stock, Tesla Motors (TSLA), which I last wrote about here nearly three months ago, on February 20. You can read that article by clicking here.
Tesla Motors is in the business of designing, manufacturing and selling revolutionary new cars, which are powered solely by batteries.
It's headquartered in Palo Alto, California. It's managed more like a high-tech company than an old-school automotive company. And its results so far have been terrific.
First the company sold more than 2,250 Roadsters, two-seat sports cars priced at roughly $110,000 each. The total production run of these cars will be 2,400, and the remaining vehicles will be sold in Europe and Asia.
Along the way it signed agreements to build powertrain systems—including lithium-ion batteries—for both Toyota and Daimler AG. That's a great testament to the quality of Tesla's engineering and I believe these agreements (and more like them) are likely to last for many years, given that Tesla's technology is patented.
But the center attraction (for now) is the Model S, a car designed to compete with the mid-level luxury sedans of the leading German manufacturers, Mercedes-Benz, BMW and Audi. Priced at roughly $60,000 (and up) it will seat five adults and two children, will go as much as 300 miles on a single charge, and will blast from 0-60 MPH in 5.5 seconds.
After that will come the Model X, a crossover/SUV with showy but practical falcon-wing doors that is also expected to sell for $60,000 and up.
Eventually, the company is likely to move to higher-volume lower-priced cars for the mass market, as its technology improves and economies of scale make it practical and profitable at lower price points--and it will be interesting to see how low Tesla's management will go.
In any case, the big news last week, when management revealed its first quarter results, is that Model S deliveries will begin in June rather than July, a full month ahead of schedule!
This is an astounding achievement for a high-tech business doing such revolutionary work, revealing an impressive level of professionalism and perfectionism. Dare I say Tesla is the automotive equipment of Apple?
Additionally, we learned:
That the company has taken more than 10,000 deposits for the Model S.
That the Model S may be "the safest car on the road" once it completes crash testing.
That the Model S is likely to get a mileage rating of 89 MPGe. (That's miles per gallon equivalent.)
That gross margins of 25% are expected in 2013.
That a major announcement about charging infrastructure is likely in July.
That there will be nearly 30 stores by year-end.
And finally, that Tesla will begin repaying its U.S. loans by the end of 2012, making it the first automaker to do so! This is big. To recap, in 2009, the Obama administration awarded Advanced Technology Vehicle Manufacturing loans to Tesla, Fisker, Ford and Nissan to create jobs and spur development of cars that used less gasoline. The loans must be fully repaid within 10 years.
Fisker has failed to meet some milestones, and been blocked from receiving the remainder of its funds. Ford and Nissan will presumably repay theirs eventually. But Tesla will repay its loan first, and in the process tell investors its positive cash flow is expected to be ample.
Some of that cash flow will come from Toyota. Details are unknown, but $100 million is the value of the current agreement and part of that will be satisfied by the powertrains incorporated in the Toyota RAV4 EV, promised for late this summer. Sadly, the vehicle will be priced at roughly $50,000, roughly double the price of a gasoline-fueled RAV4. Furthermore, Toyota expects to build just 2,600 of the cars in the next three years or so, and sell them only in California, proof that Toyota's goal is to appease regulators rather than delight customers.
Tesla, on the other hand, is totally focused on delighting its customers. (The fact that its cars are totally electric means they automatically delight regulators in California, as well as Norway, Switzerland, Netherlands and Denmark, where government tax policies favor electric cars.)
The fact that 10,000 deposits have been received (without traditional advertising and without dealer incentives) tells you many consumers are already impressed. But the "moment of truth" will come when the first Model S cars are delivered, and when the first cars are driven by and reviewed by automotive journalists. That day will come soon, and based on the fact that the company has achieved every one of its goals so far, I expect these journalists to be delighted.
One final note about the company. Unlike most traditional car companies, Tesla doesn't have an adversarial relationship with a dealer network. Like Apple, it owns its own dedicated stores, and every worker in those stores there is an employee of Tesla. And the cars (just like iPads) have prices that are precise and non-negotiable, which most consumers find much more enjoyable than haggling over price and then leaving wondering if they're been cheated.
So far, I've focused on the company. Now let's look at the stock, remembering that the two are distinct entities.
TSLA came public nearly two years ago at 17, and now it's trading at 31. So far, so good.
In fact, that performance is substantially better than the stock of General Motors, which the federal government sold back to investors at a price of 33 a few months after Tesla came public, and which is now trading at 22, down 33%.
Yet TSLA is still unloved by the vast majority of investors, if not unknown. Skepticism is rampant.
Why? Because most investors run spreadsheets that look at traditional measures of value, like earnings and stock valuation, and by those measures, TSLA is a disaster waiting to happen. After all, the company has never made a penny and its stock is valued at $3.53 billion, one-tenth the value of GM.
Also figuring into most investors' reasoning are the problems experienced by other manufacturers, from Fisker (technical troubles, layoffs, the government loans), to Chevrolet (the Volt has had technical troubles and production has been cut because of slow sales). They tar Tesla with the same brush, even though Tesla has made no mistakes yet.
But the simple fact is that most investors are avoiding TSLA because most investors have a difficult time imagining a revolutionary future, and most investors fail to appreciate the power of romance to move a stock.
The revolutionary future in this case revolves around the electric car, which never needs to stop at a gas station, which needs far less maintenance than a gasoline-fueled car and which serves its owner well if it is simply plugged in each night, just as I plug in my iPhone.
And the role of romance means that valuation measures are irrelevant (yes!) in a growth stock's early phases. You can understand this by considering potential money flows.
In this case, you have an automotive industry valued at roughly $650 billion. Heading the list are Toyota at $140 billion, Volkswagen at $64 billion, Honda at $62 billion and Daimler at $54 billion, followed by Nissan at $44 billion, Ford at $40 billion, General Motors at $34 billion and finally Tata Motors at $17 billion.
Little Tesla is valued at just $4 billion--and that looks high if you simply consider that the company's revenues in the past 12 months were just $185 million.
But it looks low if you consider the company's growth potential together with the ability of that $650 billion to shift from one investment bucket to another rather quickly.
All those established manufacturers, you see, are owned by thousands of institutional investors. These investors are a conservative, fearful group, conditioned by the shocks of the economic implosion of 2008 and the weak rebound since.
As a group, they tend to pay more attention to risk management, and many have given up on the prospects for real growth in the industry. But as they see Tesla selling tens of thousands of cars, and turning very profitable very quickly, I think their eyes will be opened. Recognizing the growth potential of Tesla, they'll bite the bullet and invest "a little" despite the stock's high valuation.
How much is a little? Well, if it's just 1% of their investment in those old automotive companies, it would amount to $6.5 billion, or more than twice Tesla's valuation today!
In short, when TSLA is recognized as the best-managed, most profitable (per car) and fastest-growing major automobile company, every investor in the industry will have to buy in.
My suggestion to you is to invest before they do.
Better yet, take a subscription to the newsletter I edit, Cabot Stock of the Month, to get regular updates on this stock, and other great stocks as well. To learn more, click here.
By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month 2/20/12
Moving on to a recommended investment, I'll start by saying I could recommend 100 stocks today. That's how strong this market is. Among well-known names alone, I could recommend Whole Foods Market (WFM), Ulta Salon (ULTA), Caterpillar (CAT), Home Depot (HD), FedEx (FDX), Lululemon (LULU) and Michael Kors (KORS).
All are growing, all are strong, and all have been recommended in Cabot advisories.
But instead I want to talk a bit about Tesla (TSLA), the electric car company.
The high points, quickly, are these:
Tesla was founded and is led by Elon Musk, the genius who invented PayPal. There were co-founders but Elon is the man at the helm today.
The company is headquartered in Silicon Valley, and run like an Internet company, not an old-fashioned car company.
Its strategy of developing, building and selling high-priced cars first and then letting technology trickle down to lower-margin mass-market cars is working brilliantly; in fact, fourth quarter earnings were released last week and they were very good. Furthermore, Musk promises a profit for 2013!
And the company's engineering is so good that Mercedes-Benz has contracted for Tesla to develop a new, all-electric powertrain, and Toyota has contracted to buy production powertrains in the second quarter of 2012. This is a great endorsement of Tesla's cost structure; there are no pensions, and the work force is young, non-union and healthy.
But here's what I like best about the company, and why I think it's a long-term winner.
The company has made no mistakes!
Its cars perform superbly ... while Chevy Volt, for example, has battery fires.
Management has achieved every target it has set, while Fisker laid off people because it failed to meet a government loan deadline.
To me, this speaks of top-quality management, and in the end, management is what you're investing in. So far, Tesla's management looks golden.
And the stock looks good, too.
It came public in June 2010 at 17, and is now trading at 35, just 4% off its all-time high.
Now, some people will say the stock is too expensive. After all, 2011 revenues were $204 million and the market is now valuing the company at $3.7 billion ... 18 times revenue.
By comparison, you can buy General Motors for 28% of sales, and Ford for 35% of sales.
But I think valuation is irrelevant at this point.
What is relevant, contrarily, is the concept of Romance, Transition and Reality, a concept pioneered by my father, Carlton Lutts, who was both a romantic and an engineer.
He wrote, "A stock, like love, thrives on romance and dies on statistics."
Which means stocks that catch the public's imagination can soar to extremes way before such soaring is justified by the numbers. It's all about perception, and it happens with every new technology and in every bull market.
I've seen it in networking stocks; the original king was Cisco.
I've seen in data storage stocks; remember Iomega?
I've seen it in solar power stocks; First Solar shone brightly.
I've seen it in footwear; Crocs ran ahead of all the rest.
I've seen it in medical technology; remember Intuitive Surgical?
I've seen it in online brokers; investors in Schwab raked in the money.
I've seen it in communication stocks; remember Qwest and XM Satellite Radio?
And I've seen it in Internet stocks ... America Online and Yahoo and Amazon.com, to name a few.
So here we are, at the dawn of a revolutionary new era in the automobile business, and the easiest thing for people to do is look at GM and Ford, stocks they are comfortable with, and discuss valuation.
Meanwhile, the real opportunity is in the unknown, in Tesla, where the "unforeseeable and incalculable" mean great riches are possible a short way down the road. The choice is up to you.
For the record, Cabot Stock of the Month, which I edit, recommended buying TSLA in late December at 29 ... and it's still rated buy. So you could buy it here, but the smarter course is to take a low-risk subscription to Cabot Stock of the Month so you can keep up to date with my latest thinking.
For details, click here.
Editor's Note: The stock market is a scary place for the inexperienced. Let us guide you with our newsletter specifically designed for beginners. We'll give you one strong stock, once per month, chosen from five of our premium newsletters. Follow our recommendations, and you'll be a savvy investor sooner than you think. Click here to learn more.
By Timothy Lutts, Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 11/14/11
The most exciting electric car company is Tesla Motors (TSLA), which came public in June 2010 at 17, and is now trading at 34, just 6% off its all-time high.
If you're into cars, you probably know more about Tesla's electric cars than I can tell you here, but if you're not, you should pay attention.
I'll give you the main points right up front.
While Toyota has blanketed the U.S. with milquetoast hybrid Priuses, following the standard old automakers' game plan, and the Chevy Volt and Nissan Leaf are uninspiring "appliances," Tesla has done something different. It has built cars that are thrilling to drive. And from its headquarters in Silicon Valley, it's been acting like a high-tech company!
And why not, considering that co-founder and current CEO Elon Musk made his fortune by selling PayPal to eBay for $1.5 billion?!
While there are five official co-founders of Tesla, Musk looms large in the story because he used much of his own money to bankroll the project, supplemented in time by money from private investors--as well as $465 million from the U.S. Department of Energy. Last year's IPO was just the latest chapter of financing, and possibly the last.
From the beginning, the goal of the company has been to create and sell affordable mass-market vehicles that would have a material impact on oil consumption. But Tesla hasn't yet targeted the mass market!
Its first step was to build and sell two-seat electric sports cars costing $109,000. It's sold more than 2,000 of these Roadsters (in 30 countries) and will stop after 2,500.
The revenues from that effort are driving work on the company's next car, the Model S, a sedan that sells for $57,400. Tesla has already taken reservations for more than 6,000, and will begin deliveries next year. It also expects to offer an SUV (Model X) based on the same platform, and begin deliveries of those in 2014.
And the profits from those cars will fund development of a mass-market car, priced around $30,000, that will compete with the likes of the Toyota Camry, Honda Accord and Ford Taurus.
This strategy mimics the way successful Silicon Valley companies launch products; hit the rich early adopters first, then drive costs down to serve the mass market.
Furthermore, Tesla has boosted its cash flow by inking major deals with Daimler and Toyota for its proprietary powertrain systems ... which tells me these components are the best!
The company's revenues were $15 million in 2008, $112 million in 2009 and $117 million in 2010. Next year could bring in $550 million, as the Model S hits the streets. And Musk promises a profit in 2013.
In conclusion, Tesla looks like one of the stars of the evolving automotive revolution.
While recent history has left the roadside littered with old names (Mercury, Plymouth, Pontiac and Saturn are dead, and Saab is comatose), Tesla is a fast-growing young company with minimal debt burdens and no retirees with costly pensions!
So what to do? You could simply buy the stock today and hope for the best. Or you could take a no-risk subscription to Cabot Top Ten Trader, which recommended the stock back on September 26, when it was trading at 26, and continues to update subscribers in each issue.
I recommend the latter, because this stock could be very big, and having expert guidance will help you make the most of it. For more details, click here.
Timothy Lutts
President, Chief Investment Strategist, Editor of Cabot Stock of the Month
Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.