Articles/megaposts by DaveT

[Fallenone]

That's interesting. Could you please post the names so I can find them in Morningstar to get the same comparisons? Here is what I could find for restaurants on Morningstar. CMG: Chipotle Mexican Grill Inc Class A Top Competitors and Peers.

Starbucks 12% 4
Chipotle 20% 3

Chipotle doesn't even make the $10B minimum annual revenue I am looking for to try and match to TSLA, as it is only around $4B. Starbucks is $20B.

Sorry, I wasn't aware you are limiting to companies that have 10B rev (TSLA is not actually there yet, to be strict)

After adding this filter, here are the companies I screened out that are non-internet companies (I also excluded service type companies, which are easier to scale up supply when demand is there), have relatively low P/S (one 1.66, most below 1), 50% growth in over 10B rev.

DLTR (0.90 P/S, 109% rev growth, 20.4B rev)
XPO (0.31 P/S, 179% rev growth, 14.3B rev)
NWL (1.66 P/S, 82% rev growth, 10.7B rev)

Except for DLTR (dollar tree), I haven't even heard of the other companies so I don't have any idea how they work. But just looking at the criteria, they exist.

KHC (3.69 P/S, 91% rev growth, 26.8B rev) has a higher P/S, but growth rate and rev size are also much higher.

In fact, if I lower rev to 5B, we'll have BLDR, CAA, TSLA, OLN, and THS added to the list that now contains 9 companies. TSLA, KHC, and DLTR are the only 3 having a P/S above 1. And TSLA is the slowest in growth and among the smallest in rev but highest P/S.

 

[dennis]

Sorry, I wasn't aware you are limiting to companies that have 10B rev (TSLA is not actually there yet, to be strict)

After adding this filter, here are the companies I screened out that are non-internet companies (I also excluded service type companies, which are easier to scale up supply when demand is there), have relatively low P/S (one 1.66, most below 1), 50% growth in over 10B rev.

DLTR (0.90 P/S, 109% rev growth, 20.4B rev)
XPO (0.31 P/S, 179% rev growth, 14.3B rev)
NWL (1.66 P/S, 82% rev growth, 10.7B rev)

Except for DLTR (dollar tree), I haven't even heard of the other companies so I don't have any idea how they work. But just looking at the criteria, they exist.

KHC (3.69 P/S, 91% rev growth, 26.8B rev) has a higher P/S, but growth rate and rev size are also much higher.

In fact, if I lower rev to 5B, we'll have BLDR, CAA, TSLA, OLN, and THS added to the list that now contains 9 companies. TSLA, KHC, and DLTR are the only 3 having a P/S above 1. And TSLA is the slowest in growth and among the smallest in rev but highest P/S.

Thanks, that's very helpful. The reason for setting the bar at $10B is because I was looking to compareTesla's growth forward from $8B in 2016 to a projected $33B with 500K deliveries in 2019, rather than Tesla's growth from <$1B to $8B over the past years.

Looking at the larger companies you listed, Newell Brands (NWL) and Kraft Heinz (KHC) both have 5 year CAGR of less than 1% (0.9% for KHC, not 91%). That leaves:

Dollar Tree 21% .9
XPO Logistics 117% .3

Dollar Tree's margins are about 3% and XPO is losing money. I guess the conclusion we can draw from that is that TSLA needs to improve operating leverage as it grows to $30B+ in order to command the same multiple as AMZN, NFLX, etc.

 

[DaveT]

@dennis A few thoughts...

First, I don't like P/S as it's not very helpful to me in valuing companies. If I was to buy a company outright, I need to know their gross margins, earnings or at least earnings potential. And my offer to buy the company is going to be based on some kind of multiple of earnings or earnings potential.

Second, if you're going to use P/S then you ought to use only companies in the same auto manufacturing industry. This is only fair, since other industries have various capital costs and market forces involved. If you look at the auto industry, you'll find some of the lowest P/S ratios of any industry. It's just terrible. The reason being is because it's a very capital-intense, has high liability (ongoing lawsuits from cars built years ago), is saturated and isn't growing much as a whole.

Third, it's important to separate what TSLA fans might think TSLA is worth now and in 2020, vs what the market (made up of large investors) thinks.

Using P/S, and if you take Tesla's annual revenue run rate of let's say $10B, the market right now is giving TSLA a P/S ratio of under 3... and this is not taking into account any of Model 3. So, to say that after Model 3/Y scales to 1 million cars/year that the market is still going to give TSLA a P/S ratio of 3 is very unrealistic. The only reason TSLA is getting a P/S ratio of 3 (in an industry where most others are 0.5) is because they've got the Model 3 coming that will double or triple their revenue very soon. So, in 2020 when growth is much slower, one must reason the P/S ratio will be much lower.

Fourth, much of my reasoning for giving Tesla's auto division the valuation I'm giving is because I foresee trouble ahead for the auto industry as a whole... again, it's likely going to be a shrinking market and investors hate shrinking markets. All multiples shrink radically.

Fifth, I understand your concern that people might miss out on a huge run for TSLA. But consider the other side. Some folks are so ecstatic on TSLA that they invest at $250+ and go on margin and buy options/LEAPs, thinking TSLA is headed to the moon. And they get burnt out, and blame the shorts or the "stupid" market. The reality is, TSLA is at the price it's at now because the vast majority of investors are valuing the company like it is. I personally think once Model 3 delivers in full production, that TSLA will be a lot more solid than it is now and we'll see a decent stock appreciation. I'm looking at the stock being above $300 in 2018. But that $300+/share price is not just because of Tesla auto manufacturing... it's also because I think people are going to catch on to the value of Tesla Energy and Tesla Network somewhat.

Sixth, much of my forecasting is conservative. Further, I'm always conscious of the risk of a recession. TSLA is in a vulnerable place from now until Model 3 reaches full production. If there's a recession and let's saw the market goes down 30-35% and Tesla hits some snags, then I can see TSLA reach $100/share or lower. I rarely share this publicly on this forum because I don't want to scare people. But it's a risk that I take seriously. I maybe give it a 25% possibility (of course these odds change according to many factors).

Seventh, I think if people think the Model 3 is going to be a big success AND Tesla can succeed in one other major business (Tesla Energy, Tesla Network, Tesla Semi, etc), and that's proven correct, then they'll find that TSLA is going to appreciate a lot from now (ie., under $200).

Lastly, I wish I could go more into how I value companies and high-growth companies. I mentioned it briefly, regarding "potential earnings". But it's better explained through lots of examples and in a demo... maybe in the future, if folks are interested, I can host a google hangout and go through my method. It works well for me to evaluate if a high-growth stock is "over-valued" or "under-valued" (of course based on certain assumptions).

Oh, one more point, I do agree with those that mentioned that if Tesla blows us away with the "machine that builds the machine" and they're able to get some ridiculous gross margins on their cars, then we're going to see a much higher multiple for their valuation. For example, if they can achieve 30% margin on the Model 3... that will be hugely impressive and unexpected.

 

[Fallenone]

Thanks, that's very helpful. The reason for setting the bar at $10B is because I was looking to compareTesla's growth forward from $8B in 2016 to a projected $33B with 500K deliveries in 2019, rather than Tesla's growth from <$1B to $8B over the past years.

Looking at the larger companies you listed, Newell Brands (NWL) and Kraft Heinz (KHC) both have 5 year CAGR of less than 1% (0.9% for KHC, not 91%). That leaves:

Dollar Tree 21% .9
XPO Logistics 117% .3

Dollar Tree's margins are about 3% and XPO is losing money. I guess the conclusion we can draw from that is that TSLA needs to improve operating leverage as it grows to $30B+ in order to command the same multiple as AMZN, NFLX, etc.

Thanks for looking deeper. I remember there was M&A for KHC but not aware its previous growth rate. And I totally agree GM and net profit margin matter a lot.

 

[dennis]

@dennis A few thoughts...

First, I don't like P/S as it's not very helpful to me in valuing companies. If I was to buy a company outright, I need to know their gross margins, earnings or at least earnings potential. And my offer to buy the company is going to be based on some kind of multiple of earnings or earnings potential.

Second, if you're going to use P/S then you ought to use only companies in the same auto manufacturing industry. This is only fair, since other industries have various capital costs and market forces involved. If you look at the auto industry, you'll find some of the lowest P/S ratios of any industry. It's just terrible. The reason being is because it's a very capital-intense, has high liability (ongoing lawsuits from cars built years ago), is saturated and isn't growing much as a whole.

The crux of our disagreement Dave is that you want to value Tesla the same as the auto industry that is growing at best 10% in good years and I want to value Tesla on a growth rate of 50% per year if it achieves a successful Model 3 ramp to 500K cars in 2019. I think I've shown that across multiple industries with different capital requirements and gross margin/profit potential that $10B+ companies growing 25%-50% per year are afforded much higher multiples of both sales and earnings than their slower growing competitors. The leading companies in each of those industries have P/S ratios of 3-14. Yet you expect the market to place a P/S ratio of 1 or less on Tesla even after it achieves unprecedented growth. So we will have to agree to disagree.

 

[SBenson]

@DaveT In the context of Bolt winning Motor Trend's car of the year award, the one argument made by a number of people on this board is that GM is not setup to scale, while Tesla is doing so.

IIRC, you countered that by saying GM/LG Chem can scale, at least the battery part, in as low as 18 months. Can you please provide a few references on that topic. Thanks much

 

[WarpedOne]

IIRC, you countered that by saying GM/LG Chem can scale, at least the battery part, in as low as 18 months. Can you please provide a few references on that topic. Thanks much

I second this request and say thanks in advance.
But please, be more verbose than simple "they can".

 

[Ovulation]

The crux of our disagreement Dave is that you want to value Tesla the same as the auto industry that is growing at best 10% in good years and I want to value Tesla on a growth rate of 50% per year if it achieves a successful Model 3 ramp to 500K cars in 2019. I think I've shown that across multiple industries with different capital requirements and gross margin/profit potential that $10B+ companies growing 25%-50% per year are afforded much higher multiples of both sales and earnings than their slower growing competitors. The leading companies in each of those industries have P/S ratios of 3-14. Yet you expect the market to place a P/S ratio of 1 or less on Tesla even after it achieves unprecedented growth. So we will have to agree to disagree.

If Elon is able to pull his aliens dreadnought thing off and basically make a car as profitable as a iphone (I believe we are on the edge of a new automatization wave, the tech for is ripe and ready) then Daves assumptions are false. Right now Tesla is the major player in a (2) growth market, electrification and autonomy, When you believe that all cars will be electric (simpler to build, cheaper to maintain, cheaper fuel and so on ) than Tesla, thanks to his/her/it early investment in the Gigafactory will be able to outgrow the competition.

Many investors think like DaveT ... and that's an opportunity for longs to get in cheap .. It's risky .. of course

 

[Ovulation]

I second this request and say thanks in advance.
But please, be more verbose than simple "they can".

Yes, when will GM be able to build 1 Mio electric cars? Can they materialize a Gigafactory out of thin air? Tesla, thanks to the Gigafactory will be able to outgrow the competition. The early investment in the Gigafactory was a bold bet from a tiny startup and now it looks like an ingenious move.

 

[schonelucht]

I am not DaveT, but it is well documented that LG is building a battery plant for high capacity packs in Poland with a projected output of 100k packs. That's on top of their expansion of the Holland, Mi plant, which has seen continuous expansion with new lines being added and will reach 3GWh in the coming years. Realistically, GM is not going to ramp the Bolt from 30k to 500k units in a single year. So LG Chem should be well placed to have enough capacity in due time (if it ever comes to that of course).

Capital wise, we see that it costs LG Chem about $3400 to create a production capacity of one 200 mile battery pack per year. Their yearly capex spending on battery plants is between $200M and $300M. Not all of that is going to the high capacity packs but I think it shows LG Chem has a serious investment trajectory that will help them stay very relevant in the market.

 

[dennis]

Yes, when will GM be able to build 1 Mio electric cars? Can they materialize a Gigafactory out of thin air? Tesla, thanks to the Gigafactory will be able to outgrow the competition. The early investment in the Gigafactory was a bold bet from a tiny startup and now it looks like an ingenious move.

I had an interesting conversation about a year ago with early investor and board member Steve Jurvetson. He was musing on the genesis of the Gigafactory idea. In response to a question on a quarterly conference call Elon reflected (I'm paraphrasing) "Yeah, umm.. we will need to have all of the currently available capacity for L-ion batteries to get to that level of production."

Within about a quarter they had done the first capital raise for the Gigafactory and were off to the races. Because that's how Elon rolls.

 

[WarpedOne]

with a projected output of 100k packs

100k packs with 320km range ... so about 200m range, so let's say that is 60kWh pack. 100k 60kWh pack is 6 GWh.

being added and will reach 3GWh in the coming years

So, that is another 3 GWh. Together their existing and planned capacity totals under 10 GWh that is supposed to be completed by the end of 2018, that is two full years from now.
This is in the context of LG being some kind of "competitive danger" to tesla. Pure FUD.

There will be competitive danger when the world finally reaches ~10TWh of annual battery production.

 

[dennis]

Capital wise, we see that it costs LG Chem about $3400 to create a production capacity of one 200 mile battery pack per year. Their yearly capex spending on battery plants is between $200M and $300M. Not all of that is going to the high capacity packs but I think it shows LG Chem has a serious investment trajectory that will help them stay very relevant in the market.

If I divide $200M by $3400 I get about 59K. Are you saying that LG's numerous OEMs have to fight for their share of the additional 59K packs per year?

 

[schonelucht]

So, that is another 3 GWh. Together their existing and planned capacity totals under 10 GWh that is supposed to be completed by the end of 2018, that is two full years from now.

They are also expanding their Chinese operation from a current capacity of 50k packs/year to 200k/packs a year. If you are interested in their total production capacity growth plans you should also look into their Korean operations but I didn't immediately find anything English language related on that one.

 

[WarpedOne]

If you are interested in their total production capacity growth plans you should also ..

We all are interested in their combined production (plans). Would you please sum them up for the world to see how 'dangerous' competitive-wise they are?

Burden of proof is on the shoulders of the man who makes the claim. I've heard many claimes how LG can do this or that, but no impressive numbers.

100k 60kWh in 2018 pack is not impressive at all.

 

[schonelucht]

If I divide $200M by $3400 I get about 59K. Are you saying that LG's numerous OEMs have to fight for their share of the additional 59K packs per year?

Only one of their OEMS is buying 60kWh packs. Most are buying smaller hybrid packs some are buying even smaller residential storage packs. I don't think they are fighting, otherwise LG Chem wouldn't be working with razor thin operating margins.

 

[SBenson]

Just so everybody understands, the focus of my question is not the amount of capacity that is planned for next few years. But the speed at which that they can expand capacity if they see enough demand.

Even if LG Chem has only plans to expand to 3GHh, if lets say Bolt wilds succeeds and is flying off of dealer lots, then say in 6months time GM/LG Chem decide that they want much more capacity, say for argument sake another 15 to 20 GWhs, how long will it take? If the answer is, as little as 18 months. Then they could put a dent into Model 3 demand. Isn't it? Again just saying a "dent" not full blown competition or a "tesla killer" or anything like that.

 

[schonelucht]

We all are interested in their combined production (plans). Would you please sum them up for the world to see how 'dangerous' competitive-wise they are?

I understood the request to be : show that LG Chem can scale demand for the EV Bolt? The capacity that I documented is more than enough to match GM's potential scaling in the next 2-3 years. In the interest of transparency, I don't see GM scaling their Bolt operations to more than 280k/year (but I've been wrong before). Do you think they have plans to do so? If so, then yes LG Chem won't be able to keep up anymore unless they invest more.

 

[WarpedOne]

Say for argument sake another 15 to 20 GWhs, how long will it take? If the answer is, as little as 18 months.

Battery production capacity can be massively parallel as long you have the $$$ and you can secure required amounts of raw materials.
Poland plant will cost some $300M for ~6 GWh. 20 GWh thus projects to some $1B and 100 GWh to $5B. These are 'tesla-like' numbers, another point to believe them.

Question boils down to:
- does LG have enough capital source
- will LG have the confidence to invest such big numbers after they got burned once already?

My bet is they will be cautious and proceed in relatively small steps like that Poland plant. In this way they will stay the second biggest battery producer for some time to come and leave the first place to panasonic/tesla.
They can still make a lot of money this way, but they won't enable mass market transition to EVs.

 

[dennis]

I understood the request to be : show that LG Chem can scale demand for the EV Bolt? The capacity that I documented is more than enough to match GM's potential scaling in the next 2-3 years. In the interest of transparency, I don't see GM scaling their Bolt operations to more than 280k/year (but I've been wrong before). Do you think they have plans to do so? If so, then yes LG Chem won't be able to keep up anymore unless they invest more.

Well that may be fine for GM but what about Nissan, Jaguar, Mercedes and the others who are planning long range BEVs for 2018+ and are relying on LG Chem to supply them with batteries?