Tesla Inc (TSLA)

[TRUISM]

Tesla to Generate More Appreciation
Solid near-term execution will send shares of the maker of electric cars higher.
By Pacific Crest Securities Brad Erickson

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We are lowering our estimates of Tesla Motors and setting a price target of $316. Our rating is Outperform.

While Tesla's (ticker: TSLA) longer drivetrain warranty lowers gross margins modestly, we continue to like the name on solid execution surmounting a near-term wall of worry, new product optimism and low near-term risk around longer-term projects like Gigafactory and Model III.





While the more robust drivetrain warranty modestly lowers gross margin on the 85 kilowatt-hour (kWh) Model S, we believe investors should focus on the policy continuing to help drive demand and share gains in the over $1.3 trillion new-car sales market.

We estimate the incremental warranty reserve at slightly above $300 per 85 kWh Model S, which we believe equates to roughly 30 basis points of gross-margin headwind going forward. We estimate a 10-cent earnings-per-share impact in the third quarter, including a $10 million one-time charge for vehicles sold in arrears, and an impact of three cents in the fourth quarter, which lowers our 2014 EPS estimate to $1.17 from $1.30. Similarly, in 2015 and 2016, we are lowering our EPS estimates to $3.08 and $7.80, respectively, from $3.18 and $7.99, respectively, on revenue of $6.14 billion and $11.40 billion, respectively.

We continue to believe there is a wall of worry to climb around execution of both production and deliveries, with a particular emphasis on North American deliveries. We believe demand appears readily available to meet, if not exceed, 2014 expectations, while our recent visit to the company's manufacturing facility indicates the production line switchover is tracking in line.

As such, we continue to believe Tesla's longer-term growth trajectory is underappreciated and that solid near-term execution will increasingly illuminate this for investors, grinding shares of Tesla higher.




TRUTH