At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Tesla makes this banker spin donuts
Defying a diving Dow, shares of electric-car maker Tesla Motors (Nasdaq: TSLA ) kicked on the afterburners Monday, and raced ahead for a 7% gain. For this, you can thank the friendly analysts at Morgan Stanley... who became a whole lot friendlier to Tesla yesterday. Formerly bearish on the company, with an "underweight" rating on its stock, Morgan now says Tesla's a winner, and reversed itself to give Tesla an "overweight" rating yesterday.
Arguing that Tesla bears, who've criticized the company's slow rate of Model S production, are just a bunch of worrywarts (I'm paraphrasing), Morgan Stanley reminded investors that since founder Elon Musk is basically betting the future of his company on the new Model S sedan, then "a new Model S has to be perfect right out of the box." Accordingly, the company has to take the time to make sure each new electric car it makes is picture perfect from the get-go. And if that means Tesla only builds 10 cars a week (as it was doing last quarter), then so be it.
Faster, farther, more, more, more!
Of course, already Tesla has left that 10-cars-per-week pace in the dust. Indeed, over the weekend, Mr. Musk tweeted his followers that Tesla had just broken the 100-car-per-week barrier for the first time ever -- a tenfold increase in the production rate, accomplished in just a few weeks' time.
So... wonderful news, right? Far from building cars too slowly, Tesla is racing ahead just as fast as can be. In a report that came out on the heels of Musk's tweet, the chief energy strategist for research shop Blue Phoenix reminded investors that Tesla has promised to hit a production rate of "at least 20,000 units" by next year -- which works out to roughly 400 cars a week.
Wait. Hold up a sec...
And yet, when viewed side by side, these two statements don't jibe. On the one hand, Morgan Stanley says Tesla must take its time building the Model S, and that 10 cars per week, or certainly 100, is just fine. On the other hand, Blue Phoenix says Tesla's soon going to be building cars at 40 times the lower rate. Indeed, that Tesla must build cars at this breakneck pace if it's to fulfill its promise of "at least 20,000 units."
But doesn't this contradict Morgan Stanley's praise of the "go slow" strategy? It almost seems to be a "heads-Tesla-loses, tails-it-can't-win" argument. Tesla can either fulfill its promise, sacrificing quality along the way, or else it can go slow, and miss its 20,000-car target by a mile.
Keep your eye on the ball
Who's right in this debate? Investors who bid up the shares by 7% yesterday appear to be betting on the best of both worlds -- that Tesla will build 20,000 cars a year, and build them all flawlessly. This, however, sounds unrealistic. After all, Tesla has already shown itself vulnerable to quality control issues -- and at a much smaller production volume -- when a faulty cable connection necessitated the recall of 36% of its Roadster fleet back in 2010. Chances are good that as Tesla builds more cars, and faster than it's ever built them before, similar quality control issues will eventually crop up again.
What's really key, though, isn't how many cars Tesla builds, but how profitably it builds them. So far, the company has booked more than 12,000 preorders for the Model S. That puts it neck-and-neck with General Motors (NYSE: GM ) in the "electric car" race, and far ahead of Nissan. Ford's (NYSE: F ) electric Focus, meanwhile, is so far back in the pack that it doesn't even show up in Tesla's rearview mirror. But at least these firms are earning a profit on their (mostly gas-powered) cars, averaging operating profit margins of anywhere from 4.5% to 5.5%.
Honda (NYSE: HMC ) , a second-tier hybrid car builder, likewise gets 4.5% operating profit margins on its products, while even Toyota (NYSE: TM ) , no longer king of the hill profits-wise, gets a respectable 3.8% margin. Investors in Tesla, in contrast, have spent the last couple years trying to justify their company's stock price based on "price-to-sales" ratios. That's no easy task, since the firm's 22 P/S ratio is 73 times as big as what Ford shares command, and 88 times the P/S ratio at GM. But, until Tesla generates some profits from its Model S sales, it's all Tesla investors have to work with.
Can Tesla justify Morgan Stanley's optimism, and break into the big leagues of car manufacturing? Can it manufacture 20,000 cars a year, avoiding manufacturing missteps along the way? I'm rooting for it, certainly, but I honestly don't know. What I do know is that it's not how much Tesla sells that should matter to investors, but how much profit it makes per car that we should focus on.
What does it take to make a profitable, large-scale car company work? Find out in our new premium research report on Ford.