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Why Tesla's Good Earnings Just Weren't Good Enough

When Tesla Motors (NASDAQ: TSLA  ) recently released its third-quarter earnings, it beat the analysts' consensus -- and shares proceeded to drop like a rock. While Tesla is an amazing, game-changing company, perhaps now is a good time for a reality check. While we're at it, let's consider whether Tesla (at its current price) is really a better investment than traditional automakers like Ford (NYSE: F  ) and General Motors (NYSE: GM  ) .

Tesla's third quarter: good, but not amazing
Before we dive into the numbers and start critiquing Tesla, let's take a moment to appreciate just how far the company has come. Tesla reported $431 million in revenue during the quarter. Considering where the company stood just a few years ago, that's an incredible achievement. From the chart below, I think it's fair to say the Model S is a hit:

Source: TD Ameritrade.

However, that higher revenue still resulted in a loss of $38 million, which translates to a loss of $0.32 per share. Estimates had projected a narrower loss of $0.25 per share. Using Tesla's "preferred" method of non-GAAP (adjusted) results, the company made $16 million ($0.12 per share), a penny over estimates.

Analyst projections were getting really high with regard to the number of cars Tesla would produce -- creating an excellent example of the market getting a bit ahead of the company's actual success. Tesla itself had projected that it would deliver 5,000 Model S vehicles during the quarter. However, with all the "Tesla euphoria," some analysts were projecting numbers closer to 6,000.  

So, when Tesla reported 5,500 deliveries, it disappointed the overly optimistic analysts, and the stock plummeted.  The same can be said for future projections. Tesla is projecting 6,000 deliveries in the fourth quarter, well below the 6,600 analysts were hoping for.

While I feel that the steep post-earnings decline was more about profit-taking than anything else, I do worry that the shares now price in all the growth potential, but not enough of the execution risks. For example, Tesla plans on introducing its highly anticipated Model X crossover next year, and a lower-priced vehicle shortly after that. Any production delays for either model might crush the company's bottom line.

Ford and GM are the "safer" options?
It's been a while since the American automakers were called "safer" than anything. While the U.S. automakers are far from a "sure bet," at this point they're priced attractively for the amount of risk their shareholders take on.

While Ford's annual revenue is still about $38 billion less than its pre-crisis level, the company has turned consistent profits in recent years. After an awful streak from 2006 to 2008 in which the company lost a total of $14.53 per share, Ford is now producing healthy-looking profits that are expected to grow in the next few years. The consensus for 2014 calls for earnings of $1.84 per share, which means that Ford trades for just 9.2 times forward earnings. That's not too shabby for a company whose earnings are projected to grow at an 11% annual rate.

General Motors is a similar story, with consistent profitability since "the new GM" emerged from bankruptcy in 2010. Since that time, GM's revenue has grown each year, and the company has reduced its footprint and restructured itself in a way that it is now sustainable and profitable. General Motors is expected to earn $4.65 per share next year, so it trades for just 7.9 times forward earnings. I believe the bankruptcy left a bad taste in the mouths of investors, and created a perceived risk that continues today, hence the cheaper valuation.

While Tesla and its Model S is perhaps the most innovative automobile since Ford's Model T, a new investment in the company  is not justified at its current price. As far as profit potential goes, investors can get into Ford or General Motors for a much better price, relative to their growth potential. 

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9/27/2016 4:01 PM
F $11.98 Down -0.03 -0.25%
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TSLA $205.81 Down -3.18 -1.52%
Tesla Motors CAPS Rating: **