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Saturday, June 22, 2013

Further Tesla Analysis Reveals Possible Liquitdy Problems

This is a followup to my previous analysis on Tesla: 

The only thing scarier than the current stock price in Tesla is the 36 pages of risk factors related to Tesla in its annual report. Below are some key takeaways from the "risks" associated with the business.

"Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment."
"Our long-term success will be dependent upon our ability to design and achieve market acceptance of new vehicle models, specifically Model S and new vehicle models such as Model X. "
"We have a history of losses and have to deliver significant cost reductions to achieve profitability in 2013 and long-term commercial success. "
"We incurred a net loss of $396.2 million for the year ended December 31, 2012. In addition, we have accumulated net losses of $1,065.6 million from our inception through December 31, 2012. We have had net losses in each quarter since our inception. Even if we are able to successfully maintain our current Model S production levels, there can be no assurance that it will be commercially successful. "
"The automotive market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future. "
"If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industry, then our financial condition, operating results, business prospects and stock price may suffer materially. "
"We may need or want to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected."


I currently feel as if the liquidity situation alone, could force Tesla into bankruptcy.

A very serious problem with Tesla is that all of its cash flows come from financing activities, which creates a very serious problem (explained further below).  For one thing, it shows that Tesla is a business not built on its business model, but built on other peoples money. Infact, Tesla pulls in more from "financing activities", than from actual sales of its cars (revenue). The whole survivability of the company is based purely on how many more people they can sucker, before the company collapses. It's all one big ponzi scheme waiting to collapse. 

Whether it be from selling stock and taking your money, or borrowing  and taking the lenders money. The great thing about significant cash flows from financing activities is that, it can make a company that does nothing, seem like something. 

 Tesla has not generated any significant profit or cash flows from operating activities, to pay for any debt. Also, Tesla is not expected to be significantly profitable for at least 2 years. So, whats happening right now is all just a game. Its to see how long the lenders will continue to supply cash to Tesla, and how fast Tesla can burn through cash.

The companies current liabilities exceed current assets, and could cause a serious liquidity problem in the future, when these debts are due. Whats even more worrisome is that the company bases its liquidity situation on a hunch that its lender will supply it with more cash  through 2013, which is supposedly when Tesla will become profitable. Even though the company forecasts further loses coming from the building of the Tesla Model X. At that point who will be supplying the cash to actually run this business? The company is eating up cash faster than it can borrow. Sooner or later, its all going to come down like a house of cards. Agressive expansion through debt is not sustainable, no matter how good the company's future prospects look.

Looking at the income statment, you can clearly see that Tesla only started gaining significant revenues, after it had take on large amounts of debt.

The company only has around $240 million in cash, compared to their large debt position of $450 million (which has been rapidly increasing YOY). So cash wont be able to cover long term debt, and further loans will be needed to pay existing debt. The company will face significant financing problems in the future, and this is being conservative. If Tesla continues to lose money as management predicts, the cash burn would be even quicker. Tesla would eventually have its equity, wiped out, and would not be able to pay off their debt (causing a liquidity problem), forcing the company into bankruptcy. 

The companies debt has increased by over 49% in just a 1 year period from FY2011 to FY2012. From FY2010 to FY2011 the long term debt of Tesla increased from $72 million to $271 million, an astounding 275% YOY increase in Debt. 

Lets hypothetically say that Tesla becomes profitable and the business model does well, how much would the company need to make just to be able to cover the increase in debt? Well, Tesla would have to increase their earnings by 49%(based on FY2011 to FY2012 data) in 1 year just to break even on their leverage.

The icing on the cake is that the company only has a measly book value of $168.5 million compared to its market cap of $11 billion. I can almost guarantee you that through future losses, the equity will be completely wiped out.

I see analysts flaunting higher price targets for Tesla left and right, while ignoring basic fundamental facts about the company in question. Sooner or later the market is going to wake up, but by then it will surely be too late. The investors and analysts will all be left scratching their heads, wondering what happened. 

Metro Inc (TSE:MRU) analaysis

Metro recently reported $3.77 in diluted earnings per share for the 2nd quarter of 2013 or realized net earnings of $366.8 million. Most of the profits coming from the sale of its investment intrest in the convient store chain "Couche-Tard". If you exclude this extraordinary item, income from continuing operations comes in at $100.5 million, which is a subsequent increase of 4.4% from $96.3 million from a year ago quarter. A good takeaway from this is that, even in a highly competitive market, Metro is still able to grow earnings.

For the Full Fiscal Year of 2012, Metro was able to book a 5.4% increase in sales, and a 18.3% increase in earnings. But, if you were to exclude the extra week in the FY2012, you will arrive at a 3.4% increase in sales from the previous year.

Metro has a fairly high return on equity for a grocery chain at 19.8% for the full fiscal year of 2012, up from 16.6% in the 2011 and 2010. Much better than Loblaws ROE of only 10%, but still behind Wal-Marts Roe of 23.7%. Metro is a profitable company, and financial soundness should not be worried about for the time being.

One important takeaway is that Metro has actually been more profitable based on Earnings per Share in the FY2012 from a year on year % increase, than any of the previous 3 years. In the past 3 years their was much less competition in the grocery retail industry, and even today with significant competition entering the market, Metro is able to turn out even higher profitability.
But, the increased earnings and profitability will be short lived, and will face reality in the FY 2013 and 2014.
Past performance is certainly no indicator of future performance. Although, Metro has done phenomenally well in the past, I still feel as if the full effects of increased competition are still yet to be seen in the upcoming quarterly reports.
There are 2 possible outcomes that I believe will happen in the upcoming earnings reports. Metro's sales will slow down, and earnings will experience a decline, through lower gross margins (Metro's new pricing strategy), and lower sales.
The second outcome could be that Metro grows sales phenomenally well as it did in the FY 2012. But of course, to attract all of these new sales in a highly competitive landscape, Metro would have to give significant discounts on its products. So gross margins would be compressed, and earnings would only grow marginally or stay relatively flat on a Year over Year basis.

Balance Sheet

The company currently trades at a price to book value 2.3 Which is a little bit over the ideal b/p of 2, but still a fair ratio for a company that continues to grow.

The current assets of the company are at $1.28 billion, while current liabilities stand at $1.152 billion. So current assets are just able to cover current liabilities. Most of the liabilities come from the account's payables owing to suppliers of the grocery chain. So, a siginficant liquidity problem is not expected, and is highly unlikely to happen.

Metro, currently has a debt to equity ratio of .27. Making Metro's debt postion solid.
Some notes to make about the debt is that: Metro has large amounts of debts ($300 million) from fluctuating intrest rates. Thus, these debts are subject to market movements in intrest rates, and could potentially pose a risk. Currently, intrest rates are at all time lows, which works in the companies favour.
An point to be made is that, having a very small debt to equity ratio could mean that management is too conservative with its business and not leveraging enough to improve shareholder returns. But, I believe that a low debt policy is ideal.

Company Overview
From the outside, Metro's business model seems relatively simple to understand. They sell food to consumers in their many grocery stores, and make a profit from the sale of those goods. But, the grocery business is far from simple.

Loblaws is an example of a once great grocery retailer falling from grace. It seemed as if nothing could stop this company, and was on its way to be one of the WORLD's biggest grocery chains. What was once a great booming company 8 years ago, is now starting lose market share, with declining profits and increased competition. Thus, making the grocery chain business highly unpredictable for any investor, no matter how stellar the past records have been. What was the chief problem with Loblaws? Too much competiton coming from Metro, Sobeys and Walmart. The recession made things even worse, with price conseous consumers turning over to less expensive grocery retailers, offering competitive pricing that Loblaws simply did not have.

What was really concerning for me is that consumers don't care about brand, and aren't willing to pay a little extra more for shopping at brand name retailers. The chief factor driving sales is pricing of the products. Thus, the competitive advantage that grocery retailers offer is none. Consumers readily move from one grocery retailer to another, and shop not on brand but on price.

Management has caught on to this trend, and has acknowledged the need for competitive pricing in its products.

One of Metro's 5 customer promises, also happens to be the most important one of all: price.
The company has been improving display locations on many of its private labels to give the perception of good value for the customers money.
Also, through reward programs  Metro is increasing long term customer satisfaction, and customer stability through their "Air miles" program.
The company has executed fairly well in its pricing strategy against other brand name competitors  and has shown through their continued increase in sales.

Market and Competition 
"Intensifying competition, the possible arrival of new competitors and changing consumer needs are constant concerns for us."
Metro currently acknowdlges the risk of incoming competitors. One competitor with a lot of financial backing would be Walmart. Of course, Walmart is a newcomer to the Canadian Grocery space, and a competitor that Metro has never faced before. How the company will fair in the future, is all dependant on how well you think management will be able to compete with a global super Titan (Walmart). Walmart is a fairly large company, and is willing to make significant discounts to gain market share over the short term, and drive more business. Even if their bottom line suffers. Walmart knows that consumer are looking for the best deals, and with their pricing power, anything is possible. With that being said, Metro should be prepared for price wars with Walmart.

Walmart does have something to offer that Metro does not, and that is online grocery delivery. Walmart delivers right to your front door, non-perishable food items! Walmart is capitalizing on the surge of consumer shopping online, and adding that competitive advantage that grocery retailers simply do not have. Online grocery shopping is still in its early stages, and the long term effects on Metro remain to be seen.

Walmart also garuntees the lowest prices on almost everything. Currently they are running ads against Metro, and convincing consumers that you can get much better deals at Walmart. It is important to note that these ad campaigns have only just started. So the effects of Walmart's competitive pricing on Metro are still yet to be seen. Therefore, I still remain skeptical on the long term earnings growth probability for Metro based on increased competition, and margin compression.

Intrinsic Value

Discounted Cash flow: Using earnings per share of $7.83 for the last 12 months, a 0% growth rate, and discount rate of 11% from a benchmark such as the S&P500, we see that Metro is fairly valued $71.18. Metro is currently trading at $69.52. The intrinsic value factors in no growth for the company. But if the company could continue to grow earnings even through a competitive landscape (at their annual 14% rate), than the company would be fairly valued at $124. But, I dont believe that the company would be able to sustain such massive growth, and a levelling off, or flattening of growth is more likely  So I feel that the 0% growth used is a fair estimate of future earnings. What may happen is that earnings might actually decrease year over year, from facts stated in previous paragraphs.
Therefore, Metro is fairly valued in the $70 range, and does not provide enough margin of safety to justify a purchase of the common stock.

I have a long term price target of $70 on Metro common stock. I would recommend holding this company. If Metro is able to maintain sales growth, while still staying relatively profitable, this price target would be revised. But, with an highly competitive lanscape, I dont see that happening.

Thursday, June 13, 2013

Tesla Motors (TSLA) Analysis

Tesla motors (TSLA) is severely overvalued, even on supposed "high future growth". You would have to be a fool to buy at such elevated prices. But then again, many investors are. How can such naive investor sentiment and exuberance go unpunished an unnoticed?
As Benjamin Graham has said, there is a difference between investing and speculating  An intelligent investor should never confuse the two things to be the same. Tesla motors falls into the category of speculation, and anyone seriously considering this company as an investment should reconsider.
Today, espeically for Tesla, it seems as if analysing a companies financials is the fools way of valuing a company. Since clear financial problems do not persuade people, I thought I would start of with a little bit of logical reasoning.

(Tesla Model S) From

Overview of the Business 

The company sells premium, high quality electric cars.
Tesla's flagship car, the Model S, currently sells at a low end price of $77,800 and a high end price of $103,000.
The problem with high end premium car companies is that, its just that, high end premium cars. Most people would not be able to afford such expensive cars, even on finance. With the average american salary in the $40,000 range, who in their right mind would even buy these cars? Price is the biggest factor affecting any purchase. Tesla is already excluding a huge base of customers. The only real customer I see shelling out this type of money for a car, would be the rich ($200,000+ annually), that only make up a small portion of the population.
Therefore, tesla is segmenting over 95% of the population in America.

On top of that, what would compel anyone to want to buy an electric car? There are much better, more cost effective fuel efficient cars on the market, and there are also many hybrids that bring the best of both worlds.
Take for example Ford's (F) new lineup of hybrid cars, the "C-max Hybrid". It is a much more cost effective car at only $28,000 and brings the benefits of electric, along with gasoline if needed. Most americans would be able to afford such a car on finance. It is also important to remember that most consumers are price conscious, and if they had to choose which electric vehicle to buy , they would no doubt go with the cheaper car (The Ford C-max hybrid) rather than the more expensive Tesla Model S.

Tesla motors is also facing increased competition not only from other established car makers, but from other electric car startups.  Car makers from BMW to Toyota are all starting to make electric cars. Tesla's doaminice on the small electric car's market is coming to an end. There is so much competition, with more cost effective vehicles, from more established names, that by the time dust settles, Tesla would have a small fraction of market share.
More competition also means more pricing pressure and more margin compression, that will shrivel away the already small 7% gross profit margin.

For the overall business, I rate this company a D


The company only has tangible assets of $525.9 million, while liabilities start at a whopping $975 million. If we where to include intangible assets, the company would only have stock holder equity of  $168 million. The company currently has a market value of $11 billion, and is trading at a significant premium to equity. So either, investors expect amazing growth, or they are buying nothing for something. The companies cash and receivables is only $440 million, which would not even cover half of its total liabilities. Making it an insolvent company.  Even if Tesla experiences fast growth, how are they possibly going to finance it?

I see shareholders cheering about recent dismal profits, as if it was good news. Only making 3 cents per share on a 98 dollar stock. Even if the company could grow those earnings by 1000% the company would still be trading at a P/E of 300! There would have to be explosive growth that will not happen to justify these lunatic prices. With increased competition entering the market, you can expect to see Tesla's  profits slowly dwindle away to nothing.

Currently Tesla has only had 1 profitable quarter, benefiting from an massive growth in revenue, to generate such small profit. Therefore, the likeliness of Tesla being highly profitable in the future is highly questionable, and revenues and sales would have to grow at an astonishing rate. Once again, an unlikely situation from increased competition, and market segmentation from high prices.

For financials I rate this company a D

Overall I rate Tesla Motors a D and a sell.

I would stay clear of Tesla at all costs. There are much better investments out there and this company is certainly not one of them. Tesla is severely overvalued, and may experience a major correction in the future.
Currently naive investors are discarding all logical reasoning and are buying up the stock to insane levels.
If you are thinking about shorting Tesla, I would do so through put options, and would not short. There could be a risk of further irrational thinking in the markets driving the stock up wildly, and you don't want to be caught up in that. But, you know just as well as I do, that the company has a dead business model, and is bound to disappoint in the future.

Monday, June 10, 2013

Barrick Gold (NYSE:ABX TSE:ABX) analysis

Lets start off with with the obvious. Barrick Gold's share price has not only under performed the market, but has also under performed gold mining peers. Many uncertainties remain at Barrick Gold and the CEO stated this up front last shareholder meeting on April. In addition, Barrick's main asset (gold) has also not been fairing favourably with investors.  As a result of Barrick Golds stock price has taken a massive tumble over the following months, and is currently at all time lows. To some investors, this looks like a classic value stock (trading under book value), at all time lows and looks "cheap".

But before we come to the conclusion that this company would be a good buy, we need to first look at the financial statements of the company, and the future outlook for gold prices. Below we use Q1 2013 earnings as the "latest" earnings.


Total assets come in at just under 49 billion, while liabilities come in at 23.7 billion.
 Equity, or book value comes in at a grand total of 25.23 billion. Currently as of Monday, 10 June , 2013, the stock trades at 20.81, and has a market cap of 20.8 billion.
At 1 billion shares, and at 25 billion in shareholder equity, the book value of the company subsequently comes in at $25 per share. While the stock currently trades at $20. Seems like a great deal! Right? Get $25 worth of equity for only $20. Free money! Well... Not exactly..
A closer look and we see that the assets are not all they appear to be.
Cash and Cash equivalent come in at only 2 billion dollars. While inventories come in at 2.8 billion. Although inventory can easily be liquidated, I would still take caution in taking this number for face value, as sale price could be substantially lower than quoted. Receivables and other current assets come in at 1.1 billion.
For sake of argument lets take the inventories value for face value, and add that together to the the receivables and cash. We get a total liquidable asset value of only 6.2 billion.

Of course, we can't forget about the non-current assets! Right off the bat I notice a large irregularity. Goodwill is a whopping 8.8 billion dollars! I don't know what about this company commands such a high premium for company branding and people, but surly it can not be 8.8 billion dollars. I know the company may try to justify this, but it is simply unjustifiable. Remember you as a shareholder can not extract value from goodwill, and therefore is meaningless to you, and should not be considered in valuing a company based on assets.
Then plants,property and equipment comes in at an even more mind boggling 30 billion dollars! This is really a mixed bag. Value can technically still be extracted from mining sites, and machinery can still have usefulness, but I usually like to discount these things. For one thing, Sale price of these items are usually nothing or substantially lower than the stated price, and these values can not be fairly assessed. Therefore, these assets do not give any real value to shareholders.
Discounting the property and machinery assets, with goodwill we find that assets are really only 11 billion dollars.

What's worse is that the company has 23 billion dollars in liabilities. Currently liabilities exceed current assets, and the company can be seen as illiquid. But once again, we can not discount that their machinery and property have some value and are being used to generate profits for the company. But, this is still a far cry from the stock being seen as a "cheap company" below book value.

For assets I rate this company a C


Management has been doing a decent job tackling through the gold "crisis", but has failed in some areas as well. For example the closure of the Chilean mine in mid April sent the stock tumbling due to environmental concerns. Surly, management or someone in the company could of recognized something and avoiding this all together.
During the shareholder meeting the CEO, started upfront by talking about the major decline in the stock price. That is a good sign, showing that management acknowledges what is going wrong, and realises that they need to improve. The CEO was talking about uncertainties in the gold market, and really putting the blame on others, rather than his own team. To some extent this is true, but I feel like he could of outlined initiatives rather than bad mouthing others.
Currently global production average per ounce of gold is at $1200, while Barrick's is only $919 per ounce. Giving the company a significant pricing advantage, and giving the company more room to wait out further declines in gold prices. Managements ability to keep costs below average could definitely be shown as a good sign. If I had to pick 1 gold miner to wait out gold prices, I would definitely pick this company.

For management I rate this company a B+

Future Gold outlook

Wall street is not bullish on gold at all, with Goldman Sachs forecasting lower gold prices in the coming year, and Deutsche Bank forecasting an even gloomier $1100 per ounce for gold. I'm not an expert on gold, and I really can not comment on these forecasts, but you can clearly see where gold may be heading in the near future. If forecasts are correct, than Barrack along with other gold miners will get crushed. The lower the price of the gold, the lower the margins, and the more pressure put on the company. It is also important to note that demand for physical gold is at unprecedented levels.

Future gold outlook C+

Overall company outlook
I am neither bearish nor am I bullish on this stock. I am currently neutral and have mixed feelings. I feel like gold may be oversold, but I also feel like more downside is possible. The risk reward , is just not there for me and so therefore, I would not recommend buying this stock, nor would I recommend shorting it.
If gold prices do rebound, this stock would return back to the 30's, and if gold prices continue to tumble, we could see this company making new all time lows. Right now this is all a gamble on gold prices, and no on knows for sure where it will be.
If you are a speculator, I would buy the stock in hopes of making big returns in a rebound of gold prices. But bear in mind of your downside risk as well.
For other investors, I would recommend waiting out on the sidelines.

If you have any questions feel free to leave a comment.

Monday, May 20, 2013

JPmorgan Shareholder Vote (JPM)

In my personal opinion based upon brief research that I have done, I have concluded that Jamie Dimon will NOT LOSE his dual titles. Why? You dont have to be a rocket scientist to figure out that the majority shareholders in JPmorgan are either high net worth individuals in favour of Dimon, or large institutions.

The only "major" institution that could sway things is Blackrock. They are undecided, but I highly doubt they would want to split the titles knowing the risks.

Wednesday, May 1, 2013

United States Steel (NYSE:X) and Cliff Natural Resources (NYSE:CLF)

I am currently very bullish on the steel sector in general. I do believe that iron ore spot prices could stay or hover around the 130 mark. Providing a very bullish scenario for Cliff. I started buying cliff as soon Although the steel sector is tough to be in, I still believe that united States Steel is severely undervalued, and would be hard to ever get these cheap prices again.