Morgan Stanley analyst Adam Jonas, who rates Tesla shares "overweight" with a $153 price target, has made the Palo Alto, Calif.-based car manufacturer Morgan Stanley's top automotive stock, ahead of Ford (F), BorgWarner (BWA), General Motors (GM) and TRW (TRW). With the recent pull back in Tesla shares, Jones suggests the stock has a lot of room to run.
"We believe negative news flow on Model S fires, while clearly disruptive to the stocks momentum, will not cause material damage to the business," Jonas wrote in the report. "The pullback has created more than 20% upside to our $153 target (unchanged), enough to make TSLA our top pick out of 26 names in our US auto coverage."
Jonas notes that Tesla shares have gone from more than 20% overvalued to nearly 20% undervalued in a span of just two months, given the company's momentum and cult-like behavior, something TheStreet's Jim Cramer has noted several times. Much of this volatility is due to the company's fourth-quarter guidance in which Tesla said it would deliver just under 6,000 Model S units as the company continues to remain supply-constrained.
Tesla said it expects to "deliver slightly under 6,000 Model S vehicles in Q4, which increases our total expected deliveries to 21,500 vehicles worldwide for 2013." For the third-quarter, Tesla earned 12 cents a share on $603 million in revenue, as the company delivered 5,500 Model S units during the quarter. Gross margins came in at 21%, excluding Zero Emission Vehicle (ZEV) credits.
Jonas argues that Tesla can't be valued "on near-term multiple metrics like traditional auto companies given that we expect Tesla to multiply revenues by more than 10x from 2012 to 2016 by nearly 30x by 2020 and around 60x by 2027." As such, his price target is based on a discounted cash flow 15 years into the future that allows for full maturation of the Model S, the Model X and the third-gen vehicle which Elon Musk has said in the past will cost around $40,000.
A smaller part of the decline, perhaps less-than-half, Jonas noted, is due to the worries over the safety of the Model S which has experienced three fires in the past few months prompting Tesla to call for a probe by the National Highway Traffic Safety Administration (NHTSA). Jonas said the fires and the ultimate NHTSA response are "not analyzable" and that investors should expect future fires. CEO Elon Musk has countered that Model S is the safest car on the road.
In a blog post to Tesla's website, Musk said, "It is literally impossible for another car to have a better safety track record, as it would have to possess mystical powers of healing."
Tesla has "rolled out an over-the-air update to the air suspension that will result in greater ground clearance at highway speeds." He noted this is about reducing the chances of underbody impact damage, not improving safety, as Musk, and others have repeatedly said the Model S is the safest car on the road. "Another software update expected in January will give the driver direct control of the air suspension ride height transitions," Musk said in the post.
Though the decision from the NHTSA is expected to take a while, the German Federal Motor Transport Authority, Kraftfahrt-Bundesamt (KBA), similar to the NHTSA, cleared Tesla of any wrong doing. "According to the documents, no manufacturer-related defects [herstellerseitiger Mangel] could be found. Therefore, no further measures under the German Product Safety Act [Produktsicherheitsgesetz (ProdSG)] are deemed necessary," the agency said in a letter.
That decision prompted another analyst, Jefferies' Elaine Kwei to argue that the NHTSA will have a favorable outcome, regarding Tesla. "We think this should provide greater confidence that the NHTSA investigation will result in a favorable outcome in the U.S. as well, providing a positive catalyst for the stock," Kwei wrote in her note, despite cutting the price target to $190 from $210.
TSLA data by YCharts
Ultimately, Jonas notes this may not be the bottom for Tesla shares, but investors should consider buying it. "While TSLA still has a lot to prove to fundamentally justify its valuation, we believe the stock offers a better risk-adjusted return vs. any other stock in our US auto coverage."
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