More market madness

More market madness

Is this a further example of financial folly in today’s febrile and frenzied markets?

US electric car maker Tesla is now valued by investors higher than Ford, the second oldest vehicle manufacturer in the world.

Last night Tesla topped $300 per share in the wake of record deliveries and output in this year’s first quarter. The maker of electric cars and energy-storage devices managed to ship just over 25,000 vehicles the three months to end-March, topping the average analyst forecast of 24,200. Confidence is now growing that Tesla will meet its target of delivering as many as 50,000 vehicles in this year’s first half.

On the back of that stock price move, Tesla now has a market cap of almost $49bn.

In contrast, Ford is valued at $45.5bn. And Tesla is fast catching up America’s largest car maker GM whose market worth is around $51bn. Yet with Tesla aiming to build at least three more Gigafactories later this year and deliver 500,000 cars by end-2018, there are many pundits who reckon it will soon overtake GM in value.

At first glance, it might be tempting to agree.

But hang on a minute…isn’t this more equity market madness? How on earth can Tesla be worth more than Ford?

I’m the first to admit that I’m not an American auto-industry specialist. But let’s take a quick look at the numbers.

Ford’s turnover may under pressure. But in 2016 it sold more than 6.5m vehicles worldwide and generated almost $142bn in revenue (which is three times the company’s market cap).

Even if sales dip this year, Ford is forecast to make pre-tax profits of some $9bn and earnings per share (EPS) of around $1.60. At the present share price of $11.37 that’s a price-to-earnings ratio (PER) of just above seven times. And even if Ford only maintains its dividend in 2017, the yield still tops 5%.

In short, Ford is a real money-making company (though in a tough business).

Contrast this with Tesla. We’ll draw a veil over this year as the forecast figures are too stretched to be true. In 2018, revenues are expected by the analyst community to jump by 70% to almost $20m. In other words, that’s still only 40% of the market cap.

Consensus EPS estimates are for another loss this year and about $2.6 in 2018. But this would be a PER of well north of 100! Meanwhile the forecast dividend of 20c per share might just pay for, err, well what can you get for 20c nowadays?

In my opinion, here’s a classic illustration of how equity markets, and in particular Wall Street, have lost the plot. Funny money created by central bankers to stave off recession/deflation and boost economic growth/inflation has leaked out into stocks, in many instances causing a level of valuation imbalance that defies gravity.

Here’s what I find most frightening – even insane. It’s the general acceptance amongst analysts and commentators that companies such as Tesla are genuinely worth what I consider to be hugely over-extended valuations.

At this point I’m expecting to be branded a dinosaur, a Luddite or even worse. And I’m waiting to be told that I simply don’t understand what Tesla is all about and how good its long-term growth prospects really are.

I’m not making a judgement on Tesla itself as a company here. As I’ve said, I don’t have enough specialist knowledge of the technology to do so. I’m not even saying that Ford is a cheap stock. The auto business is cyclical, highly competitive and low margin, meaning that car manufacturing companies often sell on very lowly ratings. And as Tesla will discover, over time it will be subject to the same pressures.

I do, though, have a view on shares that look far too high. And in my book, Tesla ticks all the boxes. When the equity market turndown finally arrives, Ford is likely to drop. But Tesla is the sort of stock – along with plenty of others, in particular in the US – that could plunge. At that point, shareholders will be asking themselves how they fell for all the hype. By then it will be too late.