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TSLA

Fuel Costs Comparison: Tesla vs ICEs

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Hidden within a previous post on “How Green is Your Tesla” was a discussion of fuel costs.  But with gas pricing falling, I thought fuel costs deserved another look.  Attached is a handy spreadsheet that calculates how many miles per gallon your gas powered car has to get for fuel costs to be less than for a Tesla Model S 85.  The calculation is done assuming that electricity costs either 25 cents or 35 cents per kilowatt hour.  Those are the second and third tier rates charged by Southern California Edison in the Los Angeles area.  You can plug in your own rate, but remember you want a marginal rate after taking account of your normal home usage.  The marginal rate is more likely priced at a higher tier.  The spreadsheet also takes account of the fact that the actual Tesla range is on the order of 67% of the stated range as documented in the previous post.

As the spreadsheet shows, given a cost for gas of $4.15 per gallon (the currrent mid-grade rate in Los Angeles) , the breakeven mileage is 34.0 mpg at the 25 cent electric rate and 24.3 mpg at the 35 cent rate.  The bottom line is there may be a lot of reason for choosing an electric car but saving on fuel costs is not likely to be one of them, at least at current prices.

What Do Auto Price Earnings Ratios Tell Us?

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            On October 24, 2018 Tesla announced its best quarter ever.  Sales rose to $6.8 billion from $4 billion the previous quarter.  Gross margin improved to 22.33% from 15.46% in the second quarter of 2018 and 15.05% in the third quarter of 2017.  Most importantly, earnings per share turned positive and reached a record level of $1.75 per share.
            With Tesla’s new-found profitability, for the first time it is possible to compute meaningful P/E ratios and to make comparisons with other auto manufacturers.  To do so I assume that Tesla earns the same $1.75 per share for the next four quarters.  Some might say it should be more because Tesla is a growth company.  Others may say it should be less because Tesla pulled out all the stops to be profitable in the third quarter, including selling only high margin Model 3s.  Those of you who disagree can alter the table below to reflect your own assumptions.
            The table reports the forward P/E ratios for Tesla and the other major auto manufacturers.  The first thing to note is that all the major manufacturers tend to trade around a forward multiple of 6.  Toyota is a bit higher at 8.33 and Fiat/Chrysler is a bit lower at 3.89, but not of them approach double digits.  In contrast, Tesla’s multiple is 47.19.  While one would expect Tesla’s multiple to be higher because of its greater growth opportunities, the gap is so large that it appears as if Tesla is in a different business.  It seems hard to believe that as Tesla matures its multiples will not drop toward the industry average.  If that happens, the growth in earnings will have to be dramatic to maintain the current stock price.
 
 

Production Hell, Delivery Hell, What the Hell is next for Tesla?

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Service hell.  Though it might be more hell for owners than for Tesla.  Tesla reported a 3rd quarter profit ather the market closed today and the stock has sky-rocketed again.  The company showed that it can produce the Model 3 in meaningful volume at margins of 20% (as long as the cars are sold for a minimu of $46,000).  The problem is that as all these added cars roll out, they will all have to be serviced.  In fact, the new Model 3s may need more service than the S or X given the race to produce them.  As the owner of an S (in fact I have owned three of them), I am dreading service hell.  Recently a light came on in my car saying that my suspension needed service.  My initial call to Tesla went unanswered.  Fortunately, the light went out.  Next time I may not be so lucky.  With limited servicen centers, no third party service outlets, and a lot of new Model 3s on the road, customers may be about to enter service hell.  What it means for the stock price is another question.

Where are all Tesla’s Competitors

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            In numerous posts on this blog, I have argued that the stock of Tesla has been overvalued.  That remains true, though less so in my opinion, today.  I say less so because one thing I did not evaluate accurately when I began constructing valuation models for Tesla in early 2014 was how slow the competition would be to produce electric cars that people would want to drive.  Tesla competitors, to the extent that any appeared, seemed to be saying that the point of an electric car was to be green and efficient, not sexy or exciting.  When I see a Chevy Bolt, or a BWM i3, or a Nissan Leaf, or basically any electric car other than Tesla my reaction is – blah.  And sales figures demonstrate I am not alone.  Apparently, people feel morally good about driving one of the Tesla competitors, but they don’t actually feel good.  Only Tesla had the design, the pizzazz and the performance to making driving special and not a chore. 
My mistake in 2014 was thinking that competition for Tesla was just around the corner.  Now, at the end of 2018, it is still just around the corner.  Although Jaguar has been promising the iPace for some time, my visits to dealers have been rewarded only with promises.  The same is true for the Porsche Taycan.  If you order one today, you can expect it sometime in 2020.  VW is promising 20 or more electric models, but there is not a meaningful Tesla competitor available today or in the near future.  The list goes on.  If you want a fun, cool, sexy, tech looking ride the choice is Tesla – period.  And that is what my valuation models missed.  The stock may still be overpriced, but how much depends on how quickly real competition emerges.  It has not been emerging very quickly.

 

How Green is Your Tesla: Update

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Recently, my son and I updated our effort to compare the efficiency and “greeness” of a Tesla Model S and a standard, non-plugin Prius.  Our latest writeup follows along with the underlying data.

            When there is mention of green and efficient cars, Tesla comes immediately to mind.  Elon Musk has been beating the drum to promote Tesla’s greenness and efficiency for years.  So how green and efficient is a Tesla compared to say a standard, non-plugin, Toyota Prius?  The only way to find is to do an experiment. 
            I drive a 2017 Tesla Model S 85D.  My son drives a standard 2015 Toyota Prius.  We both drive similar distances, on freeways and surface streets, in the area around Pasadena, California, so comparing the performance of the two cars should be an ideal experiment.  Even though gasoline is the only source of primary energy for the Prius, it sets a high standard for the Tesla because like the Tesla it converts some of the car’s kinetic energy to electrical energy stored in its batteries, rather than losing it all to heat as occurs in non-hybrid internal combustion engine (ICE) automobiles.  On the other hand, the fact that we did our experiment during the spring of 2018 in Southern California favors the Tesla because no cabin heating was required.  Using electrical energy is a very inefficient way to heat the inside of a car.  In comparison, ICEs can heat the cabin at almost no cost.  A typical ICE turns about 25% of the energy in the gasoline into the kinetic energy of the car, the rest is lost as heat.  However, some of that heat can be captured to warm the car with essentially no added energy expenditure.  In comparison, a Tesla has to draw on its batteries to produce heat.  For this reason, had we done our experiment in Chicago in the winter, the results would have been much less favorable for Tesla
            Because the two cars use different fuels a conversion is required to make a direct comparison.  Because a gallon of gas contains the energy equivalent of 34.4 kilowatt hours (KWH) of electricity, I use 34.4 as the conversion factor. 
            With regard to driving habits, neither of us is an aggressive driver who performs jackrabbit starts or massive accelerations.  In my son’s case, the Prius does not make that possible.  In my case, I am 69 nears old and drive conservatively despite the fact that the Tesla has muscle car potential.
            The experiment was run over about two months during which the Tesla was recharged 15 times.  All of the results are summarized in the exhibit below.  Before turning to comparison of the cars, the first interesting thing we discovered is that the actual range of the Tesla is significantly less than the “estimated” range shown when the car is charged.  In the experiment, the Tesla was always charged to a range of 238 miles (less than the maximum to protect the batteries) and was driven until the range fell to an average of 45 miles.  If the range estimate was accurate, the average distance traveled would have been 193 miles, but in fact the average distance traveled was 128.9 miles – only 67% of the estimated range.  And this is without using the heater or the air conditioner to any meaningful extent.  The finding makes it clear that owners of electric cars need to analyze their range carefully and not rely on stated figures lest they be trapped on a lonely highway.  It also calls into question how the range of 238 miles was estimated in the first place.
            Moving on to the comparison, let’s start with the more familiar Prius.  As shown in the exhibit, the Prius averaged 43 miles per gallon.  Dividing by 34.4 KWH per gallon leads to mileage of 1.25 miles per KWH.  In comparison, the Tesla used an average 47.4 KWH to travel the 128.9 miles giving a mileage of 2.74 miles per KWH – more than twice that of the Prius.  But there is a catch.  Electricity is not a primary source of energy.  It has to be produced from something else.  For now, I assume that the source of electricity is a natural gas power plant (more on this later).  Efficient power plants turn about 43% of the energy in the natural gas into electricity.  If this 43% efficiency ratio is applied to the Tesla, the effective kilowatt hours of natural gas energy used rises to 110.2, so that the effective mileage drops to 1.18 miles per KWH – less than that of the Prius.  Remember, for every gallon of primary energy gasoline burned by an ICE car only about 25% is converted to kinetic energy.  However, that this loss is already accounted for in the miles per gallon number.  Therefore, to compare apples to apples, account must be taken of the energy loss at the power plant when primary energy (natural gas) is converted to electricity. 
            From the driver perspective, the bottom line of efficiency is fuel cost per mile.  That depends, of course, on the costs of unleaded gasoline and electricity.  Currently, the cost of gas is about $3.75 per gallon.  Estimating the cost of electricity is more complicated because there is tiered electricity pricing in California.  I assume that Tesla owners pay the mid-tier price of approximately $0.35 per KWH.  Based on these assumptions, the fuel cost per mile comes to 8.8 cents for the Prius compared to 12.8 cent for the Tesla.  In calculating the number for Tesla, the actual miles per kilowatt hour, not the effective miles per kilowatt hour, is used because the energy loss in generation is reflected in the price of electricity.
            Turning to a comparison of greenness, Tesla has an advantage.  To produce a KWH of energy from natural gas, Edison emits 190 grams of CO2.  To produce a KWH of energy from gasoline, the Prius emits 250 grams.  (Natural gas burns cleaner than gasoline.)  Consequently, the Tesla emits 161 grams per mile compared to 200 grams for the Prius, making Tesla the greener car.
            If I drop the assumption that the electricity is generated from burning natural gas, the Tesla sprints ahead on the greenness front.  In the limit, if all electricity is generated from non-carbon sources such as solar, wind and nuclear, then the Tesla does not produce any CO2 or other environmental pollution at all.  That is the big potential of electric cars.  But it all depends on how the electricity is generated.
            Although switching to non-carbon methods of generating electricity makes the Tesla more green than the Prius, it does not necessarily make it more efficient.  The electricity must still be generated from some primary source.  Depending on the efficiency of that generation process, using gasoline could be both more efficient (in terms of the amount of primary energy required to move the car one mile) and less costly per mile.
            The bottom line is as follows.  If natural gas is used to generate electricity, then the Prius edges out the Tesla in terms of efficiency – both in terms of primary energy used and fuel cost per mile.  To be fair, this is probably due in large part to the fact that the Tesla is both larger and faster.  In terms of greenness, the Tesla comes out on top.  Furthermore, as non-carbon sources of electricity generation become more common, the Tesla greenness gap will widen. 

            In closing, it should be noted that there are several factors the comparison has ignored.  For instance, the analysis does not take account of the impact of transporting the gas or electricity.  In the case of electricity, high voltage lines are a convenient and efficient way of moving power.  However, the energy loss in charging a Tesla’s batteries can be 10% or more depending on the voltage used at the charger.  The analysis also ignores the energy requirements and environmental impact of building the cars and disposing of the waste at the end of the car’s life.  Battery powered cars require a good deal more energy to build and disposal of the batteries is an environmental challenge.