Tesla Motors Inc (TSLA) News Analysis 3 Reasons Barclays PLC …

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TESLA Model S – 60 kWh Auto

3 Reasons Barclays is Maintaining its Equal-Weight Rating for Tesla Motors

Barclays PLC (ADR) (BCS) yesterday published a research report in which the investment bank reiterated its Equal-Weight rating for Tesla Motors Inc. (TSLA ). The manufacturer of electric cars, which recently announced plans to build the world’s largest battery factory. has seen its stock rally on news that the company plans to become a major luxury automaker. The company reportedly aims to generate annual sales of approximately 500,000 units by 2020.

The report used the findings from a conference held on March 7, in which analysts at Barclays had met with Tesla executives, including Jeff Evanson, the company’s president of investor relations, in Europe.

The conference had given Tesla a chance to tout upcoming efforts to drive sales of its Model S, and to inform investors of its other goals to boost revenues and reduce costs in the long run. But Brian Johnson, head of automotive sector research at Barclays, mentioned in the report that although he believes Tesla will benefit from the positive momentum due to strong product demand, his team is taking a “cautious approach” on the stock due to a number of challenges the Palo Alto-based automaker currently faces.

Barclays has a target price of $220 for Tesla stock, which represents an 8% downside from the current stock price of $238. The report mentions that the investment bank has a neutral stance on the US auto industry as a whole.

Here are three reasons Barclays is cautious as regards the future prospects of Tesla Motors and has an Equal-Weight rating:

1. Growth in Europe May be a Challenge

Tesla’s revenue growth will be driven primarily by increasing car sales in international markets. The company’s efforts to ramp up its retail presence in regions like China and Western Europe will likely benefit Tesla by adding value to its brand, which will consequently result in higher sales. However, Barclays notes that some key markets in Europe may prove to be quite challenging to penetrate given the fierce competition in the electric car segment. The investment bank’s stance remains cautious due to the following two reasons:

Tesla’s novel Supercharger network is in its nascent phases in Europe, with only 14 locations spread over the entire continent. This is a major problem for Tesla, as customers in Europe are more responsive to European luxury automakers like Daimler AG’s (DDAIY) Mercedes Benz and BMW AG (BAMXY). Barclays believes that it will take a considerable amount of time for Tesla to gain a strong foothold in the European car market, especially in light of the fact that auto sales have registered a decline in Western Europe.

Tesla recently cut the price of its Model S in various European markets, which may have been a tactic to increase demand and fend off competition from rivals. Last week, the automaker announced that it would slash the price of its Model S sedan in Germany from its launch price of €72,000 ($99,000) to €65,300 ($89,900). The Model S available in the Netherlands also had its price reduced from around €70,000 to €66,000 ($91,100).

2. Margins will Expand, but Gradually

TESLA Model S – 60 kWh Auto

Tesla’s new GigaFactory. which is expected to be completed by 2017, will contribute immensely towards reducing the costs of manufacturing the company’s battery packs. These battery packs are currently being produced at around $250/kWh, and Barclays believes that the costs will go down by an annual 5-10% as Tesla starts producing cars on a larger scale. The investment bank expects a further 30% reduction in costs once the battery factory is complete and has also stated that the effects of this substantial cost saving project will be seen most in Tesla’s affordable mass market model due to debut that year.

Barclays analyst Brian Johnson believes that the cost of a battery pack for the new Gen III electric vehicle will be in the range of $100-150/kWh once the GigaFactory is fully operational, and that while this would greatly contribute towards reducing the costs associated with building Tesla’s powertrain, the company will not see a proportionate expansion in its margins, which are expected to swell gradually.

In its fourth quarter earnings results for fiscal 2013 (4QFY13), Tesla beat Street estimates for gross margins. Its gross margins came in just above 25%, higher than 23.8% in the previous quarter. Although the management believes that Tesla’s operating margins will eventually rise to the mid-teens, analysts at Barclays think that for now, a mid-single digit estimate is more reasonable.

Barclays believes that Tesla will continue to have to spend more on RD and Supercharger installations as it invests in growth, which will bring up costs, and subsequently squeeze margins.

3. Benefits from Off-grid Storage

A large number of industry experts predict substantial gains in the form of added revenue streams from Tesla’s battery factory. One of the additional benefits most talked about is that Tesla could eventually enter the energy sector market for grid-storage for utilities, and create a name for itself in the solar industry. Many analysts have speculated that the additional revenues may double Tesla’s already exorbitant valuations.

Barclays, however, is not extremely optimistic as regards this particular opportunity: the firm believes that additional revenues from sales to other industries that could use Tesla’s batteries should boost the company’s valuation by only 20-25%, which is a far more conservative estimate when compared with other analysts’ projections.

TESLA Model S – 60 kWh Auto
TESLA Model S – 60 kWh Auto
TESLA Model S – 60 kWh Auto

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