Investment Bank on EV Maker Tesla: Buy

Investment Bank on EV Maker Tesla: Buy

By Scott Doggett September 17, 2010

Virtually overlooked by the automotive press yesterday was an analysis by a respected investment bank that predicts the value of shares in Tesla Motors, the Palo Alto, Calif., maker of battery-electric cars that just went public in June, will increase by 50 percent over the next 12 months.

In its initial report on Tesla, which had an initial public offering price of $17 a share in June and is currently trading at around $20, Dougherty & Company LLC gave the Silicon Valley automaker a strong "buy" rating and a 12-month price target of $30 per share.

"Simply put, we believe that Tesla can deliver eco-friendly driving with very few compromises," the company said in the 18-page report. "In fact, we believe that the Model S can be so good that buyer attitudes begin to shift from 'Why would I want an electric car' to 'Why would I want a gas-powered car?'"

Tesla, which has sold more than 1,200 two-seat Roadster pure-electric sports cars with a $109,000 base price since February 2009, expects to begin selling a $57,000 4-seat electric sedan in mid-2012.

Skepticism Overcome

Conceding initial skepticism, Dougherty analysts wrote Tesla's success in its powertrain business has convinced them that the company has some of the world's best electric-vehicle powertrain technology. They noted that in this business line, Tesla has competitively won and delivered on battery and drivetrain opportunities with two of the most successful car companies in the world, Toyota Motor Corp. and Daimler AG, maker of Mercedes-Benz passenger cars.

But the investment bank's decision to give Tesla stock a strong buy rating has more to do with its upcoming Model S plug-in electric vehicle than it does the EV powertrain technology leadership position the young company, headquartered on the edge of the Stanford University campus, has acquired.

The analysts wrote that following a visit to Tesla HQ shortly after completion of the Model S body, they concluded that "the car can be good enough to meet and even exceed 2013 volume expectations. In fact, the car could prove so good that it completely changes mass-market thinking about EVs."

The reason for their position: EVs have many advantages that haven't been fully explored until the Model S. They wrote that in a car designed from the ground-up as an EV, the advantages that can be teased out include better acceleration and handling, improved reliability, enhanced interior volume and greater safety. Plus, there's the benefit of substantially lower fuel costs and zero tailpipe emissions.

"We believe that Tesla is well down a path of designing that car in the Model S," the analysts wrote.

Prozac For Range Anxiety?

The well-publicized shortcomings of EVs are driving range and battery life. But with the 200-miles-plus range between charges that the Model S is expected to deliver, and the ability to replace the battery when the time comes, the Model S has overcome those major mental obstacles for many prospective buyers, the analysts wrote.

The Model S range of 160 miles to 300 miles per charge, depending on the version, is at least 60 percent farther than the stated range of the Nissan Leaf (a $32,000 vehicle before tax incentives), which is 100 miles per charge. Dougherty analysts wrote that they believe the cache of Tesla as a high-end premium brand, combined with the added range, will justify the Model S's price premium compared with mid-market EVs.

Dougherty analysts also wrote that they arrived at their $30 price target assuming the Model S will be six months late. But the alpha build of the Model S is on schedule to achieve Tesla management's guidance for first deliveries in mid-2012. Thus, the company is on track to exceed their expectations.

Most of the report focuses on assessing whether Tesla can achieve a reasonable return on the Model S. Dougherty analysts wrote that they believe the company can; the Doughtery analysis believes Tesla will be able to: decrease the cost of producing the Model S to well less than the cost of producing the Roadster; nearly meet the 25-percent gross margin expectations for the model that Tesla has set (Dougherty thinks 23 percent is achievable) and will have little trouble selling the 7,000 units it expects to make in 2012 and 20,000 units once the second shift comes online in 2013.

Second shift? The analysts wrote that the 2013 level of production likely will require two shifts at the Fremont, Calif., manufacturing facility Tesla bought this year from Toyota at a bargain price. By going to three shifts, they put initial capacity for the plant at 30,000 units. Because the plant once produced 400,000 units a year when it was operated by General Motors and Toyota, they don't foresee a problem with production capacity.

Looking beyond the Model S, the analysts wrote that Tesla's unique strengths are its proprietary power-storage and -management technology, its highly skilled, motivated and well-managed engineering team and its first-mover advantage that has allowed Tesla to put far more electrically powered miles on its 1,200-plus cars sold than any other vendor.
"Together, these strengths combine into a powerful feedback loop that should lead to break-through products," they wrote.

Images:

1. Tesla Model S by Scott Jacobs, Edmunds.com

2. Tesla Roadster by Tesla Motors

3. Cost-reduction chart by Dougherty & Co. 

 

Scott Doggett:  is an AutoObserver.com Associate Editor.