Awesome technology
Elon Musk co-founded Tesla Motors Inc (NASDAQ:TSLA) to build electric powered automobiles. The Roadster, the company’s first car, was a splashy showcase model. It proved the concept and quickly became a plaything for the rich and famous. Part of that was the car’s high price tag, but the race car design and limited range were other reasons that the Roadster was a toy and not a utilitarian vehicle.
The latest model, dubbed S, is being built and sold now with a price tag near $100,000. There was a cheaper model available, but low demand for the lesser version led Tesla Motors Inc (NASDAQ:TSLA) to drop it. The Model S is clearly designed to be a useful passenger car, but it still has a relatively high price tag and somewhat limited range.
Sales were robust enough to push Tesla into the black in the first quarter. It was the first time the company has turned a profit and proved the catalyst for the amazing price advance. Only the shares have clearly moved too far, too fast.
What’s a car company worth?
Tesla Motors Inc (NASDAQ:TSLA)’s trailing 12-month earnings are still negative, so it’s impossible to figure out a trailing price to earnings ratio. And the company stopped reporting its backlog when it turned profitable, which makes it hard to project how it might do in the future. However, the company earned a whopping $0.10 a share in the first quarter.
If you assume it can earn an equal amount each quarter, its PE would be over 280 based on recent prices around $115 a share. If earnings doubled to $0.20 a quarter, the PE would still be around 140. Tripling earnings would lead to a PE of over 90. Earnings would need to be $1.50 a quarter, or six dollars a year, to bring the PE down to around 20.
Ford Motor Company (NYSE:F)‘s PE is around 11. Toyota Motor Corporation (ADR) (NYSE:TM)‘s PE is about 21. There are two questions to ask. First, is there any chance that Tesla’s earnings are about to jump from $0.10 a quarter to $1.50? Second, is Tesla worth such a massive premium to larger, better positioned industry participants if earning don’t explode?
The company sells cool cars with impressive technology, but it is far from an earnings explosion, particularly if it can’t find buyers for cheap versions of its car. Then there’s the issue of a support infrastructure—there is none. If a Tesla Motors Inc (NASDAQ:TSLA) owner runs out of juice, the car turns into a paper weight.
In fact, Tesla Motors Inc (NASDAQ:TSLA) is planning to build out an electric “gas station” network so owners can drive coast to coast. That’s not going to be cheap, but no one else is lining up to build it so the company has no choice but to go it alone. It’s hard to believe it can turn a profit and build this network.
Buy American, or Japanese
Investors looking for an auto stock would be better off buying Ford Motor Company (NYSE:F) or Toyota Motor Corporation (ADR) (NYSE:TM). Ford was the only major domestic automobile company to avoid a government handout during the recession. And it didn’t have to resort to bankruptcy, either. Although long-term debt accounts for over 80% of its capital structure compared to less than 25% at GM, the company is strong enough to have started increasing its dividend again.
Ford Motor Company (NYSE:F)’s June sales were higher than rivals GM, Toyota Motor Corporation (ADR) (NYSE:TM), Honda, and Chrysler. And Ford has been putting up solid numbers all year. Revenue growth was higher year-over-year in each of the last two quarters. The solid showing of late has led the shares on a decent ascent, but nothing like what Tesla’s seen. Investors looking for a U.S. auto company should take a look.
Toyota is not only one of the largest car companies in the world, but it’s also one of the largest makers of hybrid vehicles. That should interest the environmentally friendly and investors seeking a way to participate in the recent uptick in auto sales.
The Japanese company went through a period in which its quality was sorely questioned. That’s largely past, though the end result is the loss of its perceived quality lead. The world-wide recession also took a toll on performance. However, Toyota appears to be getting back into the game.
Revenues and earnings headed solidly higher in fiscal 2013. Though both remain off of their 2008 peak, the business is showing glimmers of its old self. The premium PE might interest more aggressive investors who think the turnaround has more room to run.
Forget the fad
Unless Tesla Motors Inc (NASDAQ:TSLA) completely reinvents the auto industry in the next few months, or even years, the shares are too expensive today. Investors looking for a U.S. auto stock should stick to Ford. Those with an environmental bent should take a look at Toyota and its mainstream Prius brand.
The article Surprise, This Car Maker Is Overpriced! originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ford and Tesla Motors (NASDAQ:TSLA). The Motley Fool owns shares of Ford and Tesla Motors. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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