Wedbush Securities keeps its Neutral rating for Tesla Motors Inc (NASDAQ:TSLA) with a $110 price target, with the company’s Q2 earnings report due next week, Street Insider reports. The most important thing for investors to look for is gains on margins, mostly from improved operational efficiency, says Wedbush analyst Craig Irwin.


Tesla efficiency gains could be offset by low volume

Irwin expects to see an EPS of $0.21 on $385 million in revenue, versus the consensus figure of $0.16 on $396 million, with gross margins at 18 percent improving 90 basis points on last quarter. These gains will mostly come from factory efficiency and improved processes that have reduced the amount of rework necessary before cars are ready to ship, but these gains will be “offset by a moderate headwind from under-absorption of overhead for the inventory build and a less favorable options mix,” said Irwin.

Tesla Motor’s performance depends on gross margins

Irwin is less optimistic on Tesla Motors Inc (NASDAQ:TSLA) than most analysts. Dan Galves at Deutsche Bank recently changed his position from Hold to Buy and increased his target price to $160, based largely on the same facts. Both analysts think that it is realistic for gross margins to reach 25 percent by the end of the year and that Tesla Motors Inc (NASDAQ:TSLA) has shown its business model to be sustainable.

Galves even thinks it’s possible for margins to reach 35 percent if Tesla Motors Inc (NASDAQ:TSLA) can increase volume to 50,000 or more. Since volume was only around 13,000 in Q1 this year and is expected to hit 20,000 in Q2, that much growth by the end of the year seems unlikely, but it shows how much confidence Galves has in the company’s ability to deliver strong results.

“We see incremental visibility for Tesla Motors Inc (NASDAQ:TSLA) achieving 4Q13 gross margin targets of 25% excluding credits as the most important item on the call, where experience with the Roadster supports good confidence,” said Irwin.

The difference is mostly about timeframe, as Deutsche Bank thinks that Tesla Motors Inc (NASDAQ:TSLA) is going to post higher gains in their gross margins in its Q2 report, while Irwin expects it will take longer for Tesla Motors Inc (NASDAQ:TSLA) to increase volume enough to fully absorb overhead costs.