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Stock Market Analysis: 05/29/10

There will be a time and a place for Tesla to borrow money, later in its life cycle, but that time and place is not now. That debt load, already high, given Tesla’s operating cash flows is likely to get even bigger if Tesla succeeds in its newest debt issue of $1.5 billion, which it is hoping to place with an interest rate of 5.25%, trying to woo bond buyers with the same pitch of growth and hope that has been so attractive to equity markets. In fact, I cannot think of a better case of a company that is positioned to raise fresh equity to fund growth than Tesla, a company that equity investors love and have shown that love by pushing the boutique prices to record highs. Over the last decade, as Tesla has grown, it has needed substantial capital to finance its growth. Inertia: Auto companies have generally borrowed money to fund assembly plants and the bankers may be reading the capital raising recipe from that same cookbook for Tesla. It has found the last year or so tough going 1, 2 , as other logistics companies also have, but has managed to keep a lid on their business costs by paring back on capital expenditure, freezing employee pay-packets and bonuses and paying very close attention to the day to day running of the business.

 

The second is cost, since a subtext of the Tesla story, reinforced by hints from Elon Musk, is that the company has found new and innovative ways of scaling up production quickly and at much lower costs than conventional automobile companies. Furthermore, if its production costs run above expectations, it will be unable to deliver on higher margins. For Tesla to generate this higher margin, it has to be able to keep production costs low at its existing and new assembly plants and to be able to charge a premium price for its automobiles, perhaps because of its brand name. Tesla has shown a capacity to attract and keep customers and I think it is more than capable of meeting the first challenge, i.e., sell millions of cars, especially since its competition is saddled with legacy costs and image problems. The next bull cycle was characterized by consumer stocks, first the Consumer Staples and the enthusiasm spread into Consumer Discretionary companies. It certainly cannot be accomplished by investing in low-risk assets such ETFs, and the person would have to be a very good investors and achieve a just north of 20% annual ROI investing in individual stocks, or take on slightly more risk through leverage here and there.