Tesla to Address Range Anxiety, But Investor Anxiety May Be Another Matter

— -- There is much talk these days about the bright future of electrically powered cars, and specifically about Tesla, the Palo Alto, California-based manufacturer of pricey electric models.

Tesla has become a story stock, a company whose share price has rocketed upward because of popular buzz and media attention rather than actual corporate performance.

In the case of Tesla, much of its media coverage is aimed at the company’s illustrious CEO Elon Musk and the cult of entrepreneurial personality that surrounds him. Musk, who started out with software and online service companies, has acquired a reputation as a visionary from the renown of Tesla and his Space Exploration Technologies Corp., aka Space-X, a space transport/services company.

Story stocks’ sky-high valuations often stem from perceived potential, not current performance, and Tesla falls squarely into this category. As a result, compared with that of large car companies, Tesla’s share price defies logic.

Companies can fudge a lot of numbers, but they can’t fudge sales. GM’s recent price-to-sales ratio has been around 40 cents on the dollar, and Ford’s, around 45 cents — with annual revenue of about $155 billion and $144 billion, respectively. Yet with revenue of only about $4 billion, Tesla’s recent price-to-sales has recently topped $8, catapulting the company’s market capitalization (the total value of outstanding shares) to a remarkable $25 billion, compared with $60 billion for GM and $65 billion for Ford.

Tesla investors pay 20 times as much as GM and Ford investors pay for sales. Is a dollar of Tesla sales worth 20 times the dollar of sales generated by GM or Ford? Unless Tesla’s financial performance improves dramatically, investors loading up on Tesla at such prices may be sorely disappointed when the bloom eventually falls off this rose and the stock’s valuation aligns with industry realities.

Nonetheless, Tesla shares remain priced up as the company has become a touchstone for ballyhooing the future of electric cars. Electric cars may someday rule the world, but that time currently isn’t foreseeable. Battery technology has a long way to go before it is light and efficient enough to power cars for long distances — a necessity for real success as long as technologies for rapid-charging stations and power grids that can handle them remain nothing more than futuristic visions.

Even as lower-priced Teslas come on the market, challenged by the far more affordable models emerging from other manufacturers, the limited range of Teslas makes them beyond the reach of people who can’t afford an additional car just for local use or short trips. Between $70,000 and more than $100,000 for a Tesla S is a lot for an individual to pay for a second car or for a family to pay for a third car for limited use. Moreover, electric cars in general suffer from resale woes owing to the allure of federal tax incentives for new purchases. When these incentives end, resale values may do better, but new sales could then suffer.

Gasoline/electric hybrid automobiles are something else entirely. You never have to plug them in, and because they generate electrical power from the energy output of internal combustion engines, charging times and the availability of charging stations are moot. And you’ll never get stranded because of a drained battery. (Tesla has said it will announce an innovation to its cars on Thursday that will solve range anxiety for good.)

A big part of the company’s cachet is that Tesla is a sexy, techy, non-Detroit car, the brainchild of a West Coast tech guru. But in recent years, Detroit manufacturers and others, including BMW, have been ramping up their own models (including the i3), along with a growing array of hybrids. To the extent that all-electric cars eventually take off, these larger manufacturers can eat Tesla’s lunch because they have the capacity to build them in quantity.

Toyota, whose Prius is among the nation’s top sellers in any of the three power categories, recently announced that it will be coming out with a car powered by electricity produced internally from hydrogen fuel cells. Regarding luxury models to match Tesla’s, BMW is scheduled to come out this year with its i8, a sexy model for those wanting more sleekness and status than that afforded by the heavily advertised i3. (What other successful product manufacturer do those “i’s” remind you of?)

Even with hybrid success stories such as the Prius, it’s extremely difficult to pick winners in the car business several years out. Right now, conventional cars are selling well because consumers with lingering PTSD from the Great Recession are now mustering the courage to replace their aging cars. After people get their debts under control, the first big thing they buy is a car.

Low gas prices have been helping sales of less-efficient models, including SUVs and pickup trucks, dampening potential sales of hybrids and all-electrics. As many consumers may be unaware of the mercurial nature of commodity pricing, they commit to multi-year loans or leases, believing gas will necessarily be this cheap for that long. But long-term, hybrids will do well, as the Prius’ rocking sales augur.

The auto sector in general is tricky terrain for investors because amid the brisk auto sales that will probably continue for the next few years, it’s hard to pick likely winners among the large manufacturers. A time-honored strategy for cashing in on car sales without worrying about manufacturers is to invest in suppliers of parts and car systems, such as Johnson Controls (JCI) and Borg Warner (BWA), which both have healthy recent price/earnings ratios above 20, and Gentex (GNTX), whose P/E has been around 18. Some traditional suppliers, such as Johnson Controls, are getting into the electric act, enabling investors to diversify across types of power trains.

For the alternate-power-source hopeful, there are manufacturers of parts and systems for all-electric cars, such as Emerson Electric (EMR), with a recent P/E of about 18.

As far as car companies go, before anointing Elon Musk as the next Bill Gates, it’s best to focus your investing not only on perceived prospects, but also on proven performance.

To benefit from brisk car sales likely to continue in this rapidly improving economy, why try to pick winning car manufacturers when you don’t have to? To get a piece of this growth, think in terms of the dominant technologies that the auto industry in general will need.

Any opinions expressed are solely those of the author and not of ABC News.

Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.