Among the stocks listed on the James Montier Short Screener, Tesla Motors Inc. (TSLA, Financial) has the weakest financial outlook. In addition to having a high debt burden, the 2003 electric vehicle company experienced declining stock prices, cash flows and earnings. Due to the waning cash flows, gurus are reducing their positions in the company’s stock.
James Montier and his short screener
In May 2008, short seller James Montier researched ideal sell targets, according to a GuruFocus article on Nasdaq.com. Such companies trade at relatively high P/S ratios, have weak Piotroski F-scores and experience double-digit asset growth. Based on Montier’s research, GuruFocus introduced the James Montier Short Screener with the following criteria:
- Valuation rank: P/S greater than 90th percentile of the industry.
- Piotroski F-score between 0 and 3.
- Five-year asset growth rate greater than 10%.
Additionally, the sample screener below only lists midcap U.S. stocks: stocks that trade on the New York Stock Exchange or Nasdaq and have a market cap of at least $2 billion. The following three stocks, including Tesla, meet all of the above criteria.
An underperforming company stock
The 2003 electric vehicle company has a weak financial outlook, based on its financial strength rating. In addition to having a weak Piotroski F-score of 2, the 2003 electric vehicle company has poor Altman Z and Beneish M scores.
With an Altman Z-score of just 1.72, Tesla is currently in distress zones, suggesting that the company faces a high chance of bankruptcy within the next two years. Although the Z-score peaked in 2014, it has decreased in the past two years, dropping below 3.00 during 2015. Additionally, Tesla’s F-score decreased from a high of 7 to its current value during 2014, suggesting that Tesla’s business operation severely weakened during 2014.
In addition to having weak business outlook scores, Tesla has a miserable situation with its debt. Currently, the electric vehicle company has an equity-to-asset ratio of 0.11, lower than 95% of companies in the global auto manufacturing industry. Worse, Tesla is increasing its debt year over year during the past five years. High debt is a potential warning sign that a company is about to go bankrupt.
In addition to having high debt, Tesla experienced decreasing revenues per share and increasing days inventory, two other warning signs that the electric vehicle company’s business outlook is unsustainable. Although the company’s days inventory is lower than 88% of companies in the global auto manufacturing industry, the company’s current days inventory is near its all-time high.
Among the gurus who own more than 1 million shares, two have reduced their position in Tesla. Ron Baron (Trades, Portfolio) trimmed his Tesla position by 3.33%, selling 48,847 shares at an average price of $197.37. Additionally, PRIMECAP Management (Trades, Portfolio) removed 1.35% of its stake in Tesla while Ken Fisher (Trades, Portfolio) exited Tesla.
News Flash: Tesla’s stock price and cash flows take major hit with SolarCity bid
In the company’s June 21 8-K filing, Tesla announced an all-stock acquisition of SolarCity Corp. (SCTY, Financial) for $2.8 billion. However, this announcement weakened its already decreasing EPS and cash flows.
After the 2003 electric vehicle company announced the SolarCity bid June 21, its stock price dropped 10.45% the next day. On the other hand, SolarCity’s stock price increased by 3.26%.
Although Elon Musk, CEO of Tesla and chairman of SolarCity, believes that synergies exist between the two companies, analysts disagree. Both companies have weak financial strength, suggesting the deal may not work. Furthermore, the two companies, especially Tesla, have experienced decreasing earnings per share in recent years.
Like Tesla, its acquirer, SolarCity also suffers from high debt and bankruptcy risk. During the past five years, the 2006 solar energy company has steadily increased its long-term debt year over year. This likely resulted in worse cash-to-debt and equity-to-asset ratios than the electric vehicle company. Additionally, SolarCity is currently at loss, indicating that it cannot meet its interest payments. With an Altman Z-score of 1.68, the solar energy company is in distress zones and faces potential bankruptcy within two years.
Valuation Maps: a visual comparison
One of the most recent features incorporated into the All-in-One Guru Screener is the Valuation Map.
Valuation Maps allow GuruFocus users to visualize which stocks are good buys and sells based on valuation ratios, profitability and growth metrics. These maps utilize the following color scale: green for buy, black for neutral/hold and red for sell. Additionally, stocks that are shaded in dark green are potential buys or holds, and stocks that are shaded in dark red are potential sells or holds. For each financial metric, the stocks that are highlighted in one of the above colors indicate the suggested transactions. Furthermore, a multicolored bar appears below the chart, with cutoff ranges for each of the colors.
The above chart shows a valuation map of P/S ratios for stocks in the autos industry. The chart is almost all green, except that Tesla is highlighted in red. Based on the multicolored bar, Tesla has a P/S ratio that is greater than 4.6 while the other auto companies have P/S ratios less than 1.0. This suggests that Tesla should be sold based on its P/S ratio.
Six dropdown boxes appear above the valuation map, each with one of the following headings: valuation ratio, price, fundamental, profitability, growth and dividends. Each of the headings corresponds to the first six tabs on the All-in-One screener. Users can choose which financial metric they want to view the valuation map for by implementing these dropdown boxes.
See also
Tesla has a high short interest of float, a warning sign that many investors are bearish on the stock, as implied by an earlier article. Additionally, several insiders have sold shares of the company stock throughout last month. On May 25, Musk sold 2,782,670 shares of his company’s stock at an average price of $213.22 for a total transaction sale of $593.32 million.
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