Tesla Motors Inc (TSLA) Valuation: Its All About the Accounting

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Tesla Motors Inc (NASDAQ:TSLA) closed yesterday at $115.24 a share. At that price the price earnings ratio is pretty rich at what many estimate is over 100 times forward earnings. Daniel Sparks of Motley Fool has 115 as forward p/e earnings for the high flying stock, compare that to the PE ratio of Ford Motor Company (NYSE:F), which is around 10. Many buyers of Tesla Motors Inc (NASDAQ:TSLA) equity will argue that the stock price is justified because Tesla should grow earnings rapidly in the future. However, many investors are skeptical and think the premium is too high even if CEO Elon Musk is infact the next Tony Stark.

Tesla Motors Inc (TSLA) Valuation: Its All About the Accounting

Earlier, this week Elaine Kwei, CFA of Jefferies came out with a bullish report on the stock. One of the last points she makes in her argument is an interesting one, which has to do with accounting. Elaine believes that Tesla is reporting lower numbers because of lease accounting. Because of lease accounting, which Tesla will use in 2Q, analysts could be underestimating earnings.

Investopedia explains:

Income statement – A capital-lease payment includes two components: one is the interest expense – which is included in the income statement but is not part of operating income (earnings before taxes from continuing operations) – and the second component is the principal payment, which is included in the income statement and operating income. The interest portion will be higher in the first few years of the lease, and is consistent with the interest expense of an amortized loan. Total income over the life of the leased assets will be the same for operating and capital leases.

Income Statement Effect:


Under a capital lease, operating expenses include the depreciable portion of the leased asset, and the interest portion is classified as a non-operating expense and is included in earnings before tax.

  • As noted earlier, the interest expense that emerges from capital leases is highest in the first years and decreases over time (unlike depreciation expense, which is constant).
  • This creates a variation in a company’s reported total expenses. In the earlier years, a company using a capital lease will report a lower net income than a company using an operating lease.
  • This will also create a tax benefit for the company that uses a capital lease in the first years.
  • This tax benefit will cancel out because in the later years, the interest component will decrease and reported income will increase.

Tesla Motors Inc (NASDAQ:TSLA) Still On A Hot Streak

Tesla explains in their Q1 letter:

The lease accounting treatment for cars sold through our new financing plan will have no impact on our cash flows, and we expect to be roughly breakeven on cash flow from operations in Q2, despite launch costs in Europe and a huge increase in service centers, stores and Supercharger stations. However, the deferred revenue recognition required by GAAP for lease accounting will lead to a net loss on paper in Q2. We plan to provide information so that investors can evaluate our results both with and without the impact of lease accounting, as we believe the actual effect on Tesla is positive.

 Now here is Jefferies math for Tesla Motors Inc (NASDAQ:TSLA)

Lower reported revenue and EPS due to lease accounting. We are currently modestly below Street consensus non-GAAP EPS estimates for 2013 and 2014, but we believe this is an artifact of inconsistent modeling by the Street. TSLA will report using lease accounting for the first time in 2Q, but we believe this may not be reflected in all analysts’ models, resulting in a wide range of estimates on the Street, below. In 2013, revenue estimates range from $1.6 billion to $2.3 billion, despite fairly consistent expectations for deliveries and ASPs. Consequently, published EPS estimates range from ($0.85) to $0.87 in 2013, with a mean of $0.02. In 2014, EPS estimates range from ($0.15) to $2.26, with a mean of $1.04. Price targets range from $50 to $118.

See Tesla Motors Inc (TSLA) Top Auto Stock, Worth Up To $200: MS

Chart from Jefferies on wide EPS estimates based on what they believe is due to inconsistent financial modeling for Tesla Motors Inc (NASDAQ:TSLA)  earnings.


So what is Tesla Motors Inc (NASDAQ:TSLA)’s forward EPS adjusting for accounting?

From an adjusted EPS perspective, we think TSLA could do $5.50/share of earnings on $6 billion of revenue by 2017 ($3.62 after discounting back at 11%), and $9.00/share of earnings on $10 billion revenue by 2020 ($4.33 after discounting back at 11%), assuming 15% EBIT margins and a 25% effective tax rate. We expect tax rate to be lower given U.S. manufacturing tax credits. This implies a current P/E multiple of 25x-30x, which is at the lower end of the range for fast-growing energy efficiency and technology companies such as Cree (CREE, $63.83, NC), which is currently trading at 48x forward earnings and Polypore (PPO, $40.30, NC), trading at 25x forward earnings.

Answer… 25-30x forward PE. This is much lower than 115, but still far more expensive than the S&P 500 forward PE of 15 or so. Additionally, as Jefferies notes it is lower than companies like Cree, but far more expensive than Ford. In summary, even with the accounting math Tesla still seems a bit rich, but the valuations are not completely out of whack.

See Tesla Motors Inc (TSLA) Fan: “I feel like one of those Apple fan boys”

Disclosure: No position

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