Tesla’s Stock Can Hit Cruise Control If Model S Productions Sticks To Schedule

Tesla Motors (NYSE:TSLA) recently released its earnings report for the second quarter of 2012. Tesla’s primary business is the design, development and sales of electric vehicles. It also sells electric powertrain components and provides development services to other auto manufacturers. The company recently released the Model S, and has stopped production of the Roadster, with sales of the remaining inventory to be concluded over the course of this year. Key factors considered in this earnings review include the prospects of the Model S, the financial performance of the company, and its ability to achieve its stated targets.

We currently have a Trefis price of $40.74, which is about 38% above the market price.
Model S Outlook

The Model S was launched on June 22, and has been universally acclaimed as a top quality premium sedan with the potential to transform the electric vehicles industry. Tesla has reported that it is still on schedule to produce 5,000 units of the car this year, which is a positive sign, considering the doubts surrounding its ability to achieve this production target. Vehicle reservations are now at around 12,000, and have been growing at an accelerated pace since May.

One of the key parameters to consider while analyzing the company’s future prospects is the production ramp up model. The company produced around 10 cars per week this quarter, and plans to gradually increment production rates, so as to reach around 40 cars per week in Q3 and 375 cars per week in Q4. Management projects that at least 20,000 units will be produced in the next year with future production rates contingent upon demand. ((Tesla Q2 2012 Earnings Call Transcript, Seeking Alpha, July 25))

Financial Performance

Revenues generated this quarter were around $27 million, with $22 million from automotive sales and $5 million from development services. The company has projected total revenues of $500-600 million this year, primarily from sales of the Model S and the remaining Tesla Roadsters. There is also a development services contract with Daimler AG, which is expected to generate around $30 million over the next 6 quarters. The target is to achieve gross margins of atleast 25% by 2013, and the company is highly optimistic of its ability to do so.

The company has incurred large expenses this year, mainly from the development of the Model S and Model X (set for launch in 2013), and sales and marketing activities, which include the setting up of new stores.

The DOE loan facility of $465 million requires loan repayments starting this December this year. This may bring about a liquidity crunch. However, management has stated that it expects to make the loan payments on schedule and that the production ramp up process does not require a working capital injection.

Long Term Outlook

From a larger perspective, Tesla’s financial performance this quarter is primarily reflective of its transition into a large scale auto manufacturer. The expenses are typical of a company looking to expand its operations. The company is highly optimistic about the prospects of the Model S, and believes that demand constraints are not a concern.

We believe that the company continues to show promise, but there are still a number of issues that it could face. Firstly, it needs to effectively implement its production ramp up model. This depends on the company’s ability to execute effective supply chain management and quality control. Second, the company’s projections about demand for its vehicles could be overly optimistic. There are still a large number of people who are uncomfortable with electric vehicles and would prefer conventional fuel vehicles instead. However, opinions may change as the EV market grows. Finally, the loan repayments have the potential to affect liquidity requirements. We will be able to better gauge the impact of this once the payments begin in December. Overall, we are cautiously optimistic about the company’s prospects.