|Buy Tesla Stock Because of 'a Clear Trend' of Cutting Costs -- Barrons.com|
11:04 AM ET 11/11/19
|4:00 PM ET 11/11/19|
|Real time quote.|
By Al Root
It's happy Monday for Tesla shareholders. Tesla stock was up 2.7% midmorning, against a 0.3% decline for the S&P 500.
Jefferies analyst Philippe Houchois raised his price target on the maker of electric vehicles from $300 to $400 a share and maintained his Buy rating on the stock (ticker: TSLA).
"Trend cost performance outweighs 10-Q concerns," the analyst said in a Monday research report. The so-called 10-Q is a company's quarterly financial filing with the Securities and Exchange Commission. It includes more detail than companies include in quarterly earning news releases. After filing its latest report, Tesla bears criticized some balance-sheet items -- such as accounts receivable and warranty accrual. "However, much of the negative commentary ignored a clear trend of cost performance," Houchois said.
Average Model 3 prices, for instance, have come down by $13,500 since the company introduced more-affordable versions of its new midsize sedan. Variable gross profit per unit, however, has declined by only $4,700, demonstrating solid cost control.
Included in the report from Houchois are base case, upside and downside scenarios, which are useful for investors to consider.
To justify the $400 target price, Houchois sees three-year average sales growth of 25%, based on higher Model 3 sales and a successful introduction of the Model Y, Tesla's smaller sport-utility vehicle. That means Tesla sales would be about $47 billion by year-end 2022, up almost 100% over three years.
What's more, he sees upside to $500 if sales grow faster and profit margins beat his expectations. On the flip side, Houchois sees $150 downside if production delays slow the company's march toward consistent profitability. Less profit would mean more capital raising. Tesla has relied on capital markets -- debt and equity capital -- to fund growth. The need for external funds is a big reason the analyst's upside-downside spread is $350 -- about 100% of the current stock price.
Houchois is unusual in that he is an auto analyst recommending Tesla stock. He also covers other car makers, including Ferrari (RACE) and General Motors (GM). Tesla is unique because it falls between analysts covering technology or renewable energy and analysts covering car makers such as Ford Motor (F) and GM. For the most part, car analysts don't like Tesla shares, while technology analysts do. Car analysts struggle with Tesla's valuation. GM and Ford both trade below 10 times estimated earnings. Tesla trades for about 65 times estimated 2020 earnings.