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Stifel Nicolaus Upgrades Tesla Motors (TSLA) to Buy; Sees 'Defensible' Niche in Luxury EV Market

September 2, 2014 6:12 AM EDT
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Price: $173.80 +6.25%

Rating Summary:
    24 Buy, 26 Hold, 13 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 20 | Down: 14 | New: 22
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Stifel Nicolaus upgraded Tesla Motors (Nasdaq: TSLA) from Hold to Buy with a price target of $400.

Analyst James Albertine noted the following key points:

-- The Call. TSLA appears to have carved out a defensible niche in the global market for luxury electric vehicles, and based on our recent tour of the Fremont, CA, facility, a sizable head start with respect to production. The key risk remains demand, in our view, but given (a) competitors' apparent unwillingness to fully invest (resources/managerial autonomy), and (b) TSLA's brand resilience in spite of high-profile accidents/fires/recalls, it seems demand deceleration may be a late decade call at the earliest. We believe TSLA is likely to further defend its already multi-year branding/production advantage relative to OEM peers chasing luxury EV share, and TSLA's Gigafactory will only augment its implicit battery cost advantage. As U.S. vehicle sales settle into a 16.5-17 mm unit run-rate through mid-decade, we tend to favor OEMs with clearer brand messages, differentiated curb appeal, and opportunities to scale abroad, which underpins our upgrade and $400 TP.

-- Why Now? We recently hosted a tour of TSLA's production facility in Fremont, CA, where it appeared the company remains on track (if not ahead of plan) to achieving a 1,000 unit per week production rate by year-end 2014. Simply put, the rate of change vs. our last tour (May 2013) was staggering. We sense TSLA may be currently running at an 800 unit/week production rate. Stacks of finished goods inventory (front bumpers, battery packs, various body panels) suggests the demand backlog remains strong. Production scaling to 50-100k units annually for the Model S/X seems more achievable to us now, with somewhat reduced execution risks given TSLA's reported quarter-to-quarter performance since our last visit. Given the pace at which production is ramping and the fact TSLA has only recently entered the EU and Asian markets, we are incrementally confident in management's ability to leverage its brand advantage globally over the next 2-3 years.

-- Model Updates. We are raising our 2017 EPS estimate to $8.28 vs. $6.14 prior, primarily driven by (a) increased Model X pricing assumptions (now a $5-10k premium to Model S vs. a $10k discount prior), (b) modestly increased Model S/X output (111k S/X units delivered in 2017 vs. 98k prior), (c) 33% non-GAAP gross margin (vs. 30% prior), and (d) R&D expenses running at 10% of sales (vs. 9% prior) and SG&A expenses at 12% of sales (vs. 11% prior).

-- Updates vs. Prior Thesis: Having defended our more cautious stance for over a year, we find ourselves torn in upgrading as it is clear substantial risks remain. This is, in part, given (1) the lack of available data question to management's claims with respect to battery pack durability (among other long-term warranty/residual/service/charging infrastructure related issues), and/or (2) despite lofty expectations, TSLA has never generated even one-sixth of the profitability per share based on the Street's 2016 EPS outlook (even less based on our updated 2017 estimate), while tax incentives are waning and Gigafactory construction is looming. We have no clarity on battery input costs and take management at face value relative to the estimated $200-300/kWh starting point while targeting $100/kWh ICE (internal combustion engine) cost parity inside of a decade. We are also relegated to performing various mathematical gymnastics to ascertain the cadence of Model S demand in its most mature market, the U.S., each quarter. While there are no fewer than a half-a-dozen other key concerns we share with industry purists, the reality is, these issues simply do not matter with respect to TSLA's stock. TSLA sentiment is like a freight train, in our view, benefiting from a well manicured growth story that has caught the eye of a much broader investor base relative to most auto stocks. TSLA has positioned itself as the smart vehicle of the future, with a glimpse into smart purchasing and smart infrastructure. TSLA has captivated a global audience, some of whom have lost interest in distinguishing horsepower ratings among the dozens of $100k-plus luxury vehicles, others that would have never considered spending six-figures on anything but a house. Like TSLA's right place/right time purchase of the NUMMI facility, or the astounding political energy around renewables (again), our call ultimately comes down to timing. We believe our risks remain legitimate, just much further out than we anticipated. TSLA will eventually face stiffer competition from traditional OEMs, we think, and will reach a ceiling of consumer support. But it is clear from our recent factory visit and conversations with investors, customers, and management that these concerns are at the earliest, late decade issues at best. To that end, we note our call does not hinge on Gigafactory timing, nor Model III pricing/volume expectations for 2020 and beyond. We are focused on the Model S and X alone. We are simply more optimistic of TSLA's success as a "slightly bigger than niche" global luxury auto manufacturer, and like the head start management has carved out for the brand.

For an analyst ratings summary and ratings history on Tesla Motors click here. For more ratings news on Tesla Motors click here.

Shares of Tesla Motors closed at $269.70 yesterday.



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