Tesla Suppliers Provide Low Valuation Alternative

Tesla’s sales growth and product pipeline make compelling stories, but its valuation is enough to give even growth investors pause. The electric car maker hasn’t generated sustained profits on a GAAP basis, and, in terms of trailing twelve-month sales per share, the stock is trading at a price multiple of 13.4. This compares to price-to-sales (“P/S”) ratios under 1.0 for GM, Ford, and Toyota. From another perspective, Tesla is trading at nearly 40% of the market value of Ford, despite generating less than 2% of its sales.

However, Tesla has accelerated already strong sales growth. Sales nearly quintupled in 2013 after doubling in 2012. The company has the second highest three year, compound annual revenue growth rate (nearly 160%) of any U.S. company with over $1 billion in sales. Though this sales growth is projected to slow in 2014 and 2015, the company has two new product categories—a performance utility vehicle and a mass market sedan—expected to be released in the next three years.

So how can investors worried about Tesla’s valuation get a piece of this potential growth? One way is to look to those companies that are economically tied to Tesla. Tesla has frequently disclosed its battery production relationship with Panasonic, but it has been mum about many other ties. However, in looking at the disclosures of Tesla’s partners, customers, and suppliers, an investor can find several more relationships.

But a quick look at price correlations suggests that Tesla’s suppliers don’t have equal exposure to the
electric car maker.

In addition, certain large suppliers—Magna International, Dana Holding Corp., Superior Industries International, and Shiloh Industries—have primary relationships with the more established auto makers. For example, of all suppliers, Magna International has shown the highest price correlation with Tesla over one year. But approximately 70% of Magna International’s (the largest of these suppliers) revenues are provided by its top five customers: GM, Fiat, BMW, Volkswagen, and Daimler:

Fortunately, other options are available in smaller suppliers with less exposure to Tesla’s rivals in the auto industry. These include OmniVision Technologies, which supplies the image sensor for the Model S rearview camera, Mentor Graphics, which provides software for its electronics systems, Bossard Holding, which is a Swiss company providing fasteners, engineering, and logistical services, and Hulamin Limited, which is an aluminum manufacturer (the Model S uses more aluminum than most cars). While Mentor Graphics has a P/S ratio of 2.0 and Bossard trades at a ratio of 1.2, OmniVision Technologies and Hulamin Limited both have P/S ratios below 1.0. In addition, all four companies have revenues of less than $2 billion, and a smaller size has the potential to better leverage exposure to Tesla’s growth.