Tesla Motors Inc: Analysts Not Worried About ‘Consumer Reports’

Tesla Motors Inc: Analysts Not Worried About ‘Consumer Reports’
<a href="https://pixabay.com/users/Blomst/">Blomst</a> / Pixabay

Tesla Motors shares continued to fall today after a 7% decline on Tuesday following the news that Consumer Reports was pulling its purchase recommendation for the Model S. Previously, the magazine had given the EV its highest-ever rating, making Tuesday’s news a huge shock for investors.

Tesla shares fell as much as 0.98% to $210.96 per share during morning trading before they bounced, suggesting that the stock may already have hit bottom. Perhaps analysts, with their flurry of reports on the automaker, have limited the selloff.

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Impact on Tesla to be temporary

Most analysts don’t see a major long-term impact from this news. Some note that even though Consumer Reports‘ survey of Model S owners indicated lots of different kinds of problems, there haven’t been a lot of used Teslas for sale. Others think these worries will blow over by the first quarter and suggest that Tesla shares might be good to own during the first three months of 2016.

Among the problems that were reported by Model S owners are drivetrain issues, which required that the motor be replaced, failure of the charging system, issues keeping the door handles from retracting, and issues with the displays inside the car.

Not many used Teslas

In their report dated Oct. 20, Stifel analysts James Albertine and Maria Klioutcheva said they’re gathering more information on the Consumer Reports story. However, they think it’s interesting that the number of used Teslas being sold isn’t higher in light of all the problems and how long all the issues have lasted.

They found that of the approximately 1.7 million used vehicles for sale on Cars.com (as of Tuesday afternoon), there were only 150 used Model S sedans for sale, most of which are 2013 and 2014 models. They found a Model S with about 78,000 miles on it for sale for $54,600, which they believe is a “strong indication of residual value strength considering the vehicle was probably $100-$110, brand new.”

As a result, they question why there hasn’t been a sudden increase in used Teslas or in consumers using their residual value guarantee, which is provided by the automaker. In general, this view seems largely anecdotal, and perhaps a percentage comparison would be more valuable.

What about recalls?

They do suggest though that they think Tesla would have a much higher risk of recalls compared to traditional automakers, which have seen their recall rates accelerate over the last three or four years. Further, they haven’t found any evidence that the issues reported on Tuesday are new and thus don’t think they will impact future demand very much.

The Stifel analysts maintain their Buy rating and $400 per share price target on Tesla.

Tesla’s warranty data suggests improvements

In the report also dated Oct. 20, Credit Suisse analyst Dan Galves and his team believe that Model S owners are still satisfied despite Consumer Reports‘ statement that the car’s reliability will probably be “worse than average” in its next set of ratings. Further, they expect the problems to improve dramatically going forward.

They note that in last year’s third quarter, Tesla doubled the warranty time period on its drivetrain to eight years, resulting in a charge of $155 million. The Credit Suisse team believes this is a strong indication that Model S owners don’t mind paying for the repairs out of pocket after the earlier models are out of their four-year or 50,000 mile warranty.

The analysts add that Tesla’s annualized cash warranty costs have fallen to $947 in the second quarter from $1,486 in the second quarter of last year. Further, the auto industry as a whole assumes that warranty spending “is skewed significantly” to the first and last year of the warranty time frame. As of the end of the second quarter, half of Model S sedans were in the first year of service and none of them were in the fourth year.

Owning Tesla in Q1?

The Credit Suisse team suggests that the fourth quarter might be the time to own Tesla shares if the automaker is able to reach nearly full production on the Model X close to the year’s end. If Tesla is able to accomplish this, they say it should drive positive earnings per share and breakeven free cash flow early next year.

They believe Tesla will soon release more pricing details on the Model X, which should clear up the confusion that the SUV pricing will start at $132,000 and go up. They expect the Model X 90D to start out at around $95,000 and expect Tesla to release a model with a smaller battery for about $85,000 to boost demand later.

They’re not worried about demand for the Model X in the U.S. because demand for SUVs in these high prices is more than double that of sedans in the same price range. They think Tesla’s big problem is the lack of near-term positive catalysts. Another issue is uncertainty about the Model X ramp and delivery guide.

Credit Suisse has an Outperform rating and $325 per share price target on Tesla.

Bears on Tesla

Barclays analyst Brian Johnson has an Underweight rating and $180 per share price target on Tesla. He agrees that the uncertainty probably won’t last very long. They think demand might take a hit for a while because the reliability concerns might outweigh the novelty of the Model S and its features. Although Tesla management has long maintained that they are production constrained rather than demand constrained, Johnson believes demand is constrained. Johnson wrote:

“Tesla has sold cars without any publicity, and has instead relied on “word of mouth” recommendations. Issues with reliability may challenge the appeal. The result reinforces the notion (much to the chagrin and disagreement of Tesla bulls) that demand is in fact constrained.”

Tesla faces an uphill battle

Johnson also notes that Tesla’s problems are another indication that transforming itself into a mass market automaker is “harder than it looks.”  He’s unsure whether the automaker has set aside enough to pay for the costs of fixing the Model S problems. Of course if it has not, margins would be negatively impacted. He sees the possibility of margins to be weak while Tesla ramps production as well.

The Barclays analyst also notes that Tesla’s status as a “cult stock,” which CNBC’s Jim Cramer gave it more than two years ago, is now being challenged by the Consumer Reports news as its momentum grinds to a halt following the news.

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