Toyota Prius, Tata Nano, Tesla Roadster and More

Toyota Prius, Tata Nano, Tesla Roaster and More

The Automotive Revolution

The Best Stock of the Bunch

These are exciting times for observers of the automobile industry … and for a small percentage of investors in it.

The Toyota Prius has become the poster child of the hybrid car movement, leading a growing range of hybrid offerings–including the massive Cadillac Escalade– from nearly every manufacturer.

Pure electric cars are just beginning to emerge, with the Chevy Volt and Nissan Leaf targeting the mass market and Tesla aiming higher.

And as these technologies improve and gasoline and diesel-burning engines are gradually displaced from our roads, the result will be lower pollution, better health and lower oil prices, too.

But investing in automobile companies is difficult, not least because this is a mature industry.

More than four years ago, in September 2007, I surveyed all the publicly traded automobile manufacturers, asking if there were any that were attractive investments, based on either valuation or growth.

And I ranked them from best to worse.

Here’s a much-abbreviated version of my comments then.

Nissan (NSANY) … having its lunch eaten by Toyota.

Ford (F) … being killed by legacy costs, … by some measures, it’s a screaming bargain, but only if the company can find its way back to profitability.

General Motors (GM) … also cheap … but earnings estimates have been cut … and the stock has been weak for most of this year.

Honda (HMC) … a fine track record of growing both revenues and earnings … but the stock has only equaled the market’s performance over the past five years.

Toyota (TM) … the most expensive major carmaker in the world, measured by price to sales ratio. Trouble is, it’s performed no better than the broad market over the past 12 years.

DaimlerChrysler (DAI) … sells at just 58% of annual revenues … and it’s in an uptrend, so it’s probably a decent investment here.

Tata Motors (TTM) … is a real growth story! … Not as cheap as the preceding companies … but it’s got great growth prospects.

Volkswagen (VLKAY) … is hitting new highs … both revenues and earnings are on growth tracks … the most successful foreign automaker in China. In short, I like it.”

And how have these stocks done since?

Well, in the short term, Volkswagen was the top performer, climbing 255% from the time of my recommendation to its October 2008 peak as investors fled from American automakers that were nearing extinction. It’s now 27% below that 2007 point and not particularly attractive.

But in the long-term, the top performer has been Ford, which did find its way back to profitability (wisely passing up a government handout on the way), and is up 37% since that week in 2007 (after falling 88% along the way … could you have held on through that?). But the stock is weaker than Volkswagen’s and analysts are predicting reduced earnings in both 2011 and 2012, so it’s not attractive to me.

As to the others:

While all Japanese automakers were hurt by the March tsunami, there are bigger problems. Honda and Toyota are both having their lunch eaten by Hyundai/Kia of Korea. Revenues at both Japanese companies peaked in 2008 and their stocks are in downtrends. And investors in Toyota have lost 45% since 2007; that’s partly a consequence of the stock being the most highly valued back then.

Nissan is slightly better, having posted record revenues in fiscal 2011. But its stock is a yawn.

Daimler looks terrible. Revenues peaked way back in 2005 and the stock is down 52% since 2007.

General Motors looks no better. Revenues peaked in 2006, and the stock has been steadily underperforming the market since the government sold it back to the public a year ago.

In short, the stocks of all well-known automakers are unattractive.

You shouldn’t buy them for the dividends. The biggest payer is Tata, which pays 2.2% per year.

And you shouldn’t buy them for value. None of these companies qualifies for the Top 250 Value Stocks list of Cabot Benjamin Graham Value Letter.

But in the case of two companies, you might invest for growth!

The first is Tata Motors, whose stock has been weak in the recent difficult market, but may have turned the corner. The company has seen revenues grow every year of the past decade, and analysts are looking for record revenues and earnings in 2012. Tata’s after-tax profit margin is a healthy 5.9%. Additionally, the company’s Indian labor force is cost-competitive, and Tata’s ability to sell into that market as the middle class grows is tops. Finally, Tata has a broad product line, ranging from the tiny Nano–the world’s cheapest production car–to luxury cars made by Jaguar and LandRover, which Tata bought from cash-strapped Ford in 2008. So the stock is worth keeping an eye on.

The second, and most exciting company, is Tesla (TSLA), which came public in June 2010 at 17, and is now trading at 34, just 6% off its all-time high.

If you’re into cars, you probably know more about Tesla’s electric cars than I can tell you here, but if you’re not, you should pay attention.

I’ll give you the main points right up front.

While Toyota has blanketed the U.S. with milquetoast hybrid Priuses, following the standard old automakers’ game plan, and the Chevy Volt and Nissan Leaf are uninspiring “appliances,” Tesla has done something different. It has built cars that are thrilling to drive. And from its headquarters in Silicon Valley, it’s been acting like a high-tech company!

And why not, considering that co-founder and current CEO Elon Musk made his fortune by selling PayPal to eBay for $1.5 billion?!

While there are five official co-founders of Tesla, Musk looms large in the story because he used much of his own money to bankroll the project, supplemented in time by money from private investors–as well as $465 million from the U.S. Department of Energy. Last year’s IPO was just the latest chapter of financing, and possibly the last.

From the beginning, the goal of the company has been to create and sell affordable mass-market vehicles that would have a material impact on oil consumption. But Tesla hasn’t yet targeted the mass market!

Its first step was to build and sell two-seat electric sports cars costing $109,000. It’s sold more than 2,000 of these Roadsters (in 30 countries) and will stop after 2,500.

The revenues from that effort are driving work on the company’s next car, the Model S, a sedan that sells for $57,400. Tesla has already taken reservations for more than 6,000, and will begin deliveries next year. It also expects to offer an SUV (Model X) based on the same platform, and begin deliveries of those in 2014.

Tesla Model S

Photo courtesy of

And the profits from those cars will fund development of a mass-market car, priced around $30,000, that will compete with the likes of the Toyota Camry, Honda Accord and Ford Taurus.

This strategy mimics the way successful Silicon Valley companies launch products; hit the rich early adopters first, then drive costs down to serve the mass market.

Furthermore, Tesla has boosted its cash flow by inking major deals with Daimler and Toyota for its proprietary powertrain systems … which tells me these components are the best!

The company’s revenues were $15 million in 2008, $112 million in 2009 and $117 million in 2010. Next year could bring in $550 million, as the Model S hits the streets. And Musk promises a profit in 2013.

In conclusion, Tesla looks like one of the stars of the evolving automotive revolution.

While recent history has left the roadside littered with old names (Mercury, Plymouth, Pontiac and Saturn are dead, and Saab is comatose), Tesla is a fast-growing young company with minimal debt burdens and no retirees with costly pensions!

So what to do? You could simply buy the stock today and hope for the best. Or you could take a no-risk subscription to Cabot Top Ten Trader, which recommended the stock back on September 26, when it was trading at 26, and continues to update subscribers in each issue.

I recommend the latter, because this stock could be very big, and having expert guidance will help you make the most of it.

For more details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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