"Tesla Motors Loan Guaranty - A Good Deal for Taxpayers"
Sydney M. Williams
The collapse of Solyndra has raised questions about other investments and loan guarantees made by the Federal government on behalf of taxpayers. In providing a $465 million loan guarantee to Tesla Motors, has the government finally made a reasonable financial bet? The obvious answer is that nobody yet knows. On most traditional valuation metrics, the stock appears expensive. The market capitalization of the company is just over $3 billion, with book value estimated to be about $340 million. The company has a debt to equity ratio of 0.39%, with long term debt of $135 million.
Through June 30, 2011, the company has sold 1840 Tesla Roadsters since inception in 2008. At $109,000 a piece, that works out to $200,560,000 in sales. In 2010, the company generated $116 million in revenues and lost $154 million. The company claims to have pre-sold 6500 versions of the Model S for delivery in 2012. The car is an attractive four-door sedan; it appears comparable to the Audi 7. Prices for that model range from $59,000 to $79,000 depending on the battery. The prices cited above are before allowing for the $7500 federal tax credit. The Model X, aimed at the SUV/minivan market is expected to be introduced late this year for delivery in 2013. Additionally, the company sells powertrain systems to Daimler for the Smart EV and Mercedes A Class and to Toyota for the upcoming electric RAV4. The company employs 900 people, suggesting a $500,000 subsidy per employee. Analysts are estimating the company to lose $437 million over the two years, 2011 and 2012 – $2.19 per share in 2011 and $1.77 in 2012. They estimate that the company will earn $1.54 in 2013.
The Tesla situation is quite different from its competitor Fisker Automotive. Fisker having received $529 million of our money should raise eyebrows. The California-based company is backed by capitalism’s infamous nemesis – though one of its greatest practitioners – Al Gore. The funds will be used to build an $89,000 hybrid sports car in Finland. Tesla, in contrast, plans to produce the entire Model S onsite, in Fremont, California.
The business has not been without bumps. In a June 22, 2009 article, in the New York Times, Elon Musk said he “expected the company would be profitable the next month.” On February 23, 2010, Mr. Musk was quoted in a court filing: “About four months ago, I ran out of cash.” In June 2010, Tesla went public, selling 13.3 million shares at $17.00, plus 1.4 million shares from selling stockholders, including 900,212 shares belonging to Elon Musk, netting him a little over $15 million. Today, Mr. Musk owns about one quarter of the shares, valued at approximately $750 million.
The answer to the question posed in the title of this piece depends not on simply whether the investment proves to be a financial success, but will the products produced or the services provided benefit most of the citizens. As a general matter, speculating with taxpayer’s money is not the purpose of government – regardless as to whether an investment succeeds or not. According to the National Auto Dealers Association, the average car sold in the United States in 2010 sold for $28,400. At a time when millions remain unemployed and average incomes remain stuck in neutral, supporting a company that sells cars that only a small percentage of the population can afford seems frivolous. Worse, it smacks of backing wealthy Americans and foreign investors, with funds provided from the middle class who have no choice in the matter and will not benefit from any success the company may have.
Of course, the government’s argument may be that the knowledge learned from investing in Tesla may permit them or another company to generate less expensive battery-driven electric cars. But it is not as though Tesla was without other sources. The co-founder, Elon Musk, is a highly successful and very wealthy American engineer and entrepreneur (Zip2 and PayPal) of South African and Canadian heritage. Both Daimler and Toyota were early backers, as was Abu Dhabi. All three remain substantial investors. Why should government have been involved in the first place?
The bigger question, however, is: should government ever favor one business over another? Certainly, there are industries that have benefitted from government investments. For example the semiconductor industry was a beneficiary of investments made in the 1950s in defense and aerospace industries. And there are industries where government financial support is necessary, like railroads and airlines. The auto industry would likely never have come into existence had not government built roads. Tax credits have long favored industries such as energy. Utilities have used the concept of sequestration to seize private property to string power lines for the “public interest.” The shipping industry relies on public ports to operate profitably.
In general, though, public interference in private enterprise lends to less efficient businesses, meaning that consumers pay more than they would otherwise. The results can have unintended consequences. Should demand for electric cars persist, so will electricity demands, leading to more coal-fired power plants, as 50% of all electricity is generated today by coal. Additionally, concern is already being raised regarding the availability and pricing of lithium, necessary for the batteries. In terms of supply, lithium stands just above the “rare earth metals” category. Why not promote compressed natural gas in cars? Recent drilling in the Bakken Formation, the Marcellus and Barnett Shale suggest the United States has far more natural gas reserves than realized a decade ago. In addition and more critical, such collusion often leads to undue influence and corruption. Solyndra is an example.
So, my conclusion is that the investment in Tesla is mistaken, not because this particular investment may not be profitable, but because the whole concept of taking our money and using it to favor one industry, or one company, is wrong. Government should set the rules, umpire the game and then let markets determine winners and losers.
Thought of the Day
“Tesla Motors Loan Guaranty – A Good Deal for Taxpayers?”
November 1, 2011The collapse of Solyndra has raised questions about other investments and loan guarantees made by the Federal government on behalf of taxpayers. In providing a $465 million loan guarantee to Tesla Motors, has the government finally made a reasonable financial bet? The obvious answer is that nobody yet knows. On most traditional valuation metrics, the stock appears expensive. The market capitalization of the company is just over $3 billion, with book value estimated to be about $340 million. The company has a debt to equity ratio of 0.39%, with long term debt of $135 million.
Through June 30, 2011, the company has sold 1840 Tesla Roadsters since inception in 2008. At $109,000 a piece, that works out to $200,560,000 in sales. In 2010, the company generated $116 million in revenues and lost $154 million. The company claims to have pre-sold 6500 versions of the Model S for delivery in 2012. The car is an attractive four-door sedan; it appears comparable to the Audi 7. Prices for that model range from $59,000 to $79,000 depending on the battery. The prices cited above are before allowing for the $7500 federal tax credit. The Model X, aimed at the SUV/minivan market is expected to be introduced late this year for delivery in 2013. Additionally, the company sells powertrain systems to Daimler for the Smart EV and Mercedes A Class and to Toyota for the upcoming electric RAV4. The company employs 900 people, suggesting a $500,000 subsidy per employee. Analysts are estimating the company to lose $437 million over the two years, 2011 and 2012 – $2.19 per share in 2011 and $1.77 in 2012. They estimate that the company will earn $1.54 in 2013.
The Tesla situation is quite different from its competitor Fisker Automotive. Fisker having received $529 million of our money should raise eyebrows. The California-based company is backed by capitalism’s infamous nemesis – though one of its greatest practitioners – Al Gore. The funds will be used to build an $89,000 hybrid sports car in Finland. Tesla, in contrast, plans to produce the entire Model S onsite, in Fremont, California.
The business has not been without bumps. In a June 22, 2009 article, in the New York Times, Elon Musk said he “expected the company would be profitable the next month.” On February 23, 2010, Mr. Musk was quoted in a court filing: “About four months ago, I ran out of cash.” In June 2010, Tesla went public, selling 13.3 million shares at $17.00, plus 1.4 million shares from selling stockholders, including 900,212 shares belonging to Elon Musk, netting him a little over $15 million. Today, Mr. Musk owns about one quarter of the shares, valued at approximately $750 million.
The answer to the question posed in the title of this piece depends not on simply whether the investment proves to be a financial success, but will the products produced or the services provided benefit most of the citizens. As a general matter, speculating with taxpayer’s money is not the purpose of government – regardless as to whether an investment succeeds or not. According to the National Auto Dealers Association, the average car sold in the United States in 2010 sold for $28,400. At a time when millions remain unemployed and average incomes remain stuck in neutral, supporting a company that sells cars that only a small percentage of the population can afford seems frivolous. Worse, it smacks of backing wealthy Americans and foreign investors, with funds provided from the middle class who have no choice in the matter and will not benefit from any success the company may have.
Of course, the government’s argument may be that the knowledge learned from investing in Tesla may permit them or another company to generate less expensive battery-driven electric cars. But it is not as though Tesla was without other sources. The co-founder, Elon Musk, is a highly successful and very wealthy American engineer and entrepreneur (Zip2 and PayPal) of South African and Canadian heritage. Both Daimler and Toyota were early backers, as was Abu Dhabi. All three remain substantial investors. Why should government have been involved in the first place?
The bigger question, however, is: should government ever favor one business over another? Certainly, there are industries that have benefitted from government investments. For example the semiconductor industry was a beneficiary of investments made in the 1950s in defense and aerospace industries. And there are industries where government financial support is necessary, like railroads and airlines. The auto industry would likely never have come into existence had not government built roads. Tax credits have long favored industries such as energy. Utilities have used the concept of sequestration to seize private property to string power lines for the “public interest.” The shipping industry relies on public ports to operate profitably.
In general, though, public interference in private enterprise lends to less efficient businesses, meaning that consumers pay more than they would otherwise. The results can have unintended consequences. Should demand for electric cars persist, so will electricity demands, leading to more coal-fired power plants, as 50% of all electricity is generated today by coal. Additionally, concern is already being raised regarding the availability and pricing of lithium, necessary for the batteries. In terms of supply, lithium stands just above the “rare earth metals” category. Why not promote compressed natural gas in cars? Recent drilling in the Bakken Formation, the Marcellus and Barnett Shale suggest the United States has far more natural gas reserves than realized a decade ago. In addition and more critical, such collusion often leads to undue influence and corruption. Solyndra is an example.
So, my conclusion is that the investment in Tesla is mistaken, not because this particular investment may not be profitable, but because the whole concept of taking our money and using it to favor one industry, or one company, is wrong. Government should set the rules, umpire the game and then let markets determine winners and losers.
Labels: TOTD
posted by Thought of the Day @ 5:39 AM
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