Billionaire Elon Musk’s trust purchased about 35,400 shares of Tesla Motors Inc (NASDAQ:TSLA) on October 3rd at an average price of $28.25. Tesla, where Musk serves as CEO, is up 50% from its IPO price from the summer of 2010 as the company has shown some success in developing all-electric cars for the public. The news more recently has not been particularly good- late last month the firm cut its Q3 sales estimates for its Model S sedan by about 40% (read more about Tesla’s announcement)– but Musk appears somewhat confident that the company is a good long-term growth stock. Insider purchases tend to be bullish signs (see our discussion of studies on insider trading), with the general explanation being that insiders must be very bullish on the company in order to buy more of the stock and forgo the benefits of diversification. Hedge funds generally weren’t very optimistic about Tesla in the second quarter, with one exception: Eric Bannasch’s Cadian Capital added shares for a total of 3.3 million, which at that time gave the fund a position worth over $100 million (find more stock picks from Cadian Capital).
Musk’s buy is likely a welcome sign for investors, who did not get a good second quarter out of Tesla Motors Inc. Revenue was down 54% compared to the second quarter of 2011, bringing the company’s sales performance for the first half of the year to 47% below last year’s levels. Tesla wasn’t even profitable at that time, and so net losses are about twice as large as they were in the first half of 2011. Roughly half of this gap is due to increased spending on R&D, while about a quarter was due to lower operating profit (the company was able to cut some of its costs to partly make up for lower revenue).
Tesla Motors Inc began selling the Model S in June in addition to its premium Roadster product, with pricing starting at around $60,000 (before any federal incentives for purchasing an electric car). The company still expects to move 20,000 units in 2013, but will have to expand its marketing plans in order to do so and still needs to upgrade its production facilities. We’ve mentioned its current unprofitability; the sell-side actually expects positive earnings per share next year, but the P/E multiple is still very high at 77. It’s also possible that another automaker seeking stronger positioning in the electric market will look at acquiring Tesla, but for the time being we’d prefer to evaluate Tesla’s value as a stand-alone business.
Automakers, however, are still generally focused on gas-powered cars. Allowing for that, the Chevrolet Volt, Toyota Prius, and Honda Fit models make General Motors Company (NYSE:GM), Toyota Motor Corporation (NYSE:TM), and Honda Motor Co Ltd (NYSE:HMC) competitors with Tesla. Ford Motor Company (NYSE:F) also has an all-electric version of its Focus model. These companies are all profitable, and there is a stark departure in valuation for their more established businesses: Toyota carries the highest forward P/E multiple of the lot, at 10. Honda trades at 7 times forward earnings estimates, while GM and Ford’s multiples are 6 and 7, respectively. Tesla has an attractive premium brand, but its struggles are about even in percentage terms with Ford and GM. Its 54% increase in losses last quarter versus a year earlier is well in line with Ford’s 57% decline and GM’s 38% decrease in those companies’ earnings over the same period. Toyota and Honda, meanwhile, are prospering with their revenues and net income up (though the growth rates are skewed very high because of the Fukushima incident’s effects on production last year). We’d also mention that these companies are generating cash in addition to earnings, to the point where all except GM pay a dividend (with Honda’s, at a 3.2% yield, actually looking quite attractive).
Tesla’s poor business leaves two arguments for the bull case. We can’t really evaluate the possibility of an acquisition, and auto companies seem as satisfied with their all-electric offerings as they could be. GM, for example, seems to believe that the Volt is more valuable as a marketing expense- an improvement in the company’s brand that encourages purchases of other models- than as a product itself. That leaves the growth argument, and with more established companies in the market (not to mention that growth has been negative recently) we don’t think it is a buy.