Tesla Motors Inc: Junk Quality or Not?

Taking a closer look at Standard & Poor's junk rating for Tesla, the rating agency has some good points. What should investors think of the rating?

May 31, 2014 at 11:32AM

Earlier this week, Standard & Poor's Ratings Services gave Tesla Motors (NASDAQ:TSLA) a non-investment rating of B- on the company's corporate debt. That puts the company on par with countries like Congo and Pakistan. Are Tesla shareholders risking too much?

Model S China

Model S. Image source: Tesla Motors

The rating
What does a B- rating really mean? According to the rating agency's website, debt that falls under this rating is "[m]ore vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial conditions."

Standard & Poor's makes some good points.

First and foremost, Tesla's $2.9 billion in convertible bonds is a substantial sum for a company with about $700 million in revenue last quarter. Even worse, the company still isn't consistently reporting positive GAAP net income yet.

But the biggest risk, according to Standard & Poor's, is Tesla's lack of resources to withstand industry shifts. 

Our "vulnerable" business risk profile assessment incorporates Tesla's narrow product focus, concentrated production footprint, small scale relative to its larger automotive peers, limited visibility on the long-term demand for its products, and limited track record in handling execution risks that could arise in managing high volume parallel production.

In other words, Tesla doesn't have the research and development capacity to respond to rapid change. For instance, say, hydrogen fuel cell technology for vehicles suddenly becomes feasible, compelling, and marketable -- so much so that battery vehicles can't keep up. If something like this happened, bigger auto peers would have the capital needed to make rapid changes, and Tesla wouldn't.

A necessary risk
On the other side of the coin, it's Tesla's pure play on electric vehicles that gives it an advantage over its peers.

Tsla Tesla Store Tmf

Photo: The Motley Fool

If the company hedged its bets with other technologies, Tesla wouldn't have the capacity to make big bets on the future of its fully electric cars, like it is by building the Gigafactory, or the world's largest factory for producing lithium-ion batteries. In fact, investors would likely flee in droves if Tesla CEO Elon Musk suddenly expressed a new plan to hedge its bets with lithium-ion technology by testing new hydrogen fuel cell vehicles. It's Tesla's focus that gives investors confidence. Without it, Tesla wouldn't be able to execute with such ambition and timeliness.

But even though that "narrow product focus" the rating agency is worried about may be one of the key drivers behind the market's optimism for Tesla, it doesn't make Standard and Poor's objections unmerited. If Tesla's limited visibility of the demand trajectory for electric vehicles turns out to be too bullish, the company would, indeed, have a very rough road ahead -- Tesla has no plan B.

This is why a bet on Tesla, in many ways, is a bet on electric vehicles. Further, this is also why a bet on Tesla stock partly boils down to a test drive in a Model S. Investors have to ask themselves once they experience the technology, "Does Tesla's approach to electric vehicles undoubtedly have a big place in the future?"

Someone has to take a big risk to give electric vehicles a chance, and Tesla is the company has chosen to do it. As a focused niche player, the risk is certainly there, but so is the upside potential over the long haul.

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Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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