Tesla (TSLA) Initated With 'Sell' Rating at Berenberg

(Updated - February 3, 2016 7:52 AM EST)

Berenberg initiated coverage on Tesla Motors (NASDAQ: TSLA) with a Sell rating and a price target of $165. Analyst Adam Hull expressed concerns about margins, as well as valuation and competition, and he sees better value in Daimler and VW.

Excluding government incentives, Tesla’s true core gross margin in the luxury large car segment is not c24%, but under 20% whereas Mercedes and BMW achieve 35-40%, said the analyst.

"From a start-up in 2003-04, Tesla’s achievement is impressive. However, despite the negative effect of the strong dollar and the low oil price, its 2017E enterprise value of c$27bn is more than double what we estimate Mercedes is valued at," said Hull. "While the Model 3 range, presented in late March 2016 and to be delivered from Q4 2017, should be a strong product, we think margins will disappoint. We are 10-18% below 2016-18 EPS consensus, but with 2020 EPS of €9.0 we are c37% below 2020 EPS consensus of c$14.3."

The analyst continued,"At this price, we think Tesla is now a play on Model 3’s potential profits – we forecast a gross margin of 16% in 2020, well below the c20% consensus. We even assume a halving of the current non-battery Model S COGs of c$58,000. Mercedes and BMW have c$70bn of revenue in the segment yet only achieve a gross margin of c15% and an EBIT margin of c4%. Even in 2020, Tesla’s Model 3 revenue may only be c$10bn. We also think many competitors will accept large losses on EVs until 2025.

Hull added, "Falling battery costs and greater cost efficiencies support margins, but do not offset three large margin headwinds: 1) a strong US dollar, which has a direct negative effect of c500bp versus FY 2014 average, in addition to the risk that German and Japanese OEMs cut US and Chinese prices; 2) the ending of Tesla’s US federal incentive of $7,500/car before 2019, whereas competitor cars will still get it (giving them nearly a 20% price advantage over the Model 3); 3) low oil price reducing the take up of EVs."

For an analyst ratings summary and ratings history on Tesla Motors click here. For more ratings news on Tesla Motors click here.

Shares of Tesla Motors closed at $182.78 yesterday.

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