Finding Value In Tesla Motors Inc (TSLA) Suppliers

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A July 30th article from FactSet Insight provides some interesting perspective on end-around value investing, that is, how to find value in an “overvalued” stock. The specific case under discussion here is Tesla Motors Inc (NASDAQ:TSLA), and the idea is to find value by investing in lesser known Tesla suppliers instead of the much-hyped and likely overvalued Tesla Motors.

Tesla overvalued?

The FactSet article points out that Tesla Motors Inc (NASDAQ:TSLA)’s sales growth and product pipeline “make compelling stories”, but the EV maker’s current sky-high valuation would make any sane investor think twice. Note that Tesla hasn’t generated sustained profits on a GAAP basis, and the firm is trading at a 12-month trailing price to sales ratio of 13.4. This compares to price-to-sales (“P/S”) ratios under 1.0 for General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) and Toyota Motor Corp (ADR) (NYSE:TM) (TYO:7203). The article also notes that Tesla is trading at almost 40% of the market cap of Ford, despite producing less than 2% of Ford’s sales.

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Strong sales growth

On the other hand, Tesla Motors Inc (NASDAQ:TSLA) is clearly growing rapidly. Sales were up almost 500% in 2013 after more than doubling in 2012. Moreover, the firm’s 160% three year, compound annual revenue growth rate in the second highest of any U.S. company with more than $1 billion in sales. Sales growth is anticipated to slow down a bit over the next year or two, but will likely ramp again soon as Tesla is planning to release a performance utility vehicle and a consumer-focused, sub-$40,000 sedan within the next three years.

Tesla suppliers identified by FactSet

Tesla Suppliers with share price

The FactSet article highlights several smaller Tesla Motors Inc (NASDAQ:TSLA) suppliers as potentially offering greater value. In specific, “OmniVision Technologies, which supplies the image sensor for the Model S rearview camera, Mentor Graphics, which provides software for its electronics systems, Bossard Holding, which is a Swiss company providing fasteners, engineering, and logistical services, and Hulamin Limited, which is an aluminum manufacturer (the Model S uses more aluminum than most cars).”

In terms of valuation metrics, Mentor Graphics currently has a P/S ratio of 2.0 and Bossard a 1.2 ratio; and OmniVision Technologies, Inc. (NASDAQ:OVTI) and Hulamin Limited (JSE:HLM) both have P/S ratios below 1.0. Furthermore, all four companies have revenues of $2 billion or less, and as the article notes, “a smaller size has the potential to better leverage exposure to Tesla’s growth.”