Friday, May 20, 2011

Can Tesla Motor Your Portfolio Higher?

LinkedIn (NASDAQ: LNKD) had a boffo IPO Thursday that values its shares at a fairly high P/E of 584 -- about 37 times that of the average stock. But that's nothing compared to Tesla Motors (NASDAQ: TSLA) that sports a $2.7 billion market capitalization -- up 18% from its July 2010 IPO price -- despite losing $154 million on $117 million in sales in 2010. Should you hold your nose and buy?

Tesla Motors makes cool-looking electric cars. Its Tesla Roadster than can go 236 miles on a single charge. As of March 2011, Tesla had sold 1,650 Roadsters -- starting price $109,000 -- in 30 countries and it currently has 17 dealers. It also sells battery packs to Daimler -- "up to 1,000 battery packs and chargers to support a trial of the Smart for two electric," according to its most recent 10Q.  And it has received "more than 4,600 reservations" for another vehicle, the Model S.

Tesla's financial results are not as cool. For example, in the first quarter of 2011, Tesla reported a $48.9 million loss, or 51 cents a share -- that was 66% bigger than its $29.5 million loss in the previous year of $4.04 a share (its common share count rose 12-fold from 7.3 million to 95.2 million over the period).

But the good news is that Tesla's sales rose 136% to $49 million from $20.8 million and it beat by a penny analysts' forecast for an adjusted loss of 52 cents a share and by 14% revenue expectations of $43 million. If you are an investor in this stock, you are likely to seize on this good news as a reason to keep holding on.

Needless to say, a new car company has big cash needs. And it could not meet those needs without help -- it gets $465 million worth from the U.S. government in the form of a so-called loan facility from the Federal Financing Bank (FFB) that is guaranteed by the Department of Energy (DOE) Loan Facility.

This facility under the DOE’s Advanced Technology Vehicles Manufacturing Loan Program (ATVM Program) is helping to pay for Tesla to develop that Model S. And its business prospects could dim Tesla does not meet the development milestones required to get more of that cash.

Meanwhile, Tesla has about $101 million worth of cash on its balance sheet and is going to be required to come up with $17.5 million in 2011. Curiously, despite $102 million in long-term debt, Tesla does not record any interest expense on its income statement for the first quarter. Its 10Q suggests that Tesla is "capitalizing the interest expense to construction in process" -- meaning it is adding the expense to the value of the asset rather than actually paying it.

Is this just a tiny, obscure accounting matter or cause for investor concern?  You could just look on the bright side -- on May 4, Tesla Motors raised its guidance for 2011 sales by 6% from between $160 million and $175 million to between $170 million and $185 million.

But I wonder how long a company can survive making a bigger net loss than its total sales. Its market capitalization depends on its ability to convince investors to keep using their hearts and not their brains when it comes to deciding whether to fork over their hard-earned cash.

I'd avoid this equity.


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