Chronicle Journal: Finance

Tesla vs. Paccar: Which Auto Stock is a Better Buy?

The EV industry is poised for long-term growth because most countries are adapting to electric vehicles to combat climate change. Tesla (TSLA), which has already made its mark in the industry, is looking to grow further. So, a more interesting question for investors now is will Fortune 500 company Paccar (PCAR) have the right stuff to outperform TSLA? Read more to find out.

The electric vehicle industry has remained synonymous with Tesla, Inc. (TSLA) for quite some time. The company’s highly efficient, safe and stylish EVs have piqued the interest of consumers worldwide, as they have increasingly recognized the benefits of EV vehicles. The intensifying climate change debate has aided the popularity of EVs around the world as well. Today, TSLA is the largest EV manufacturer in the world, with three production facilities located in different continents.

Bellevue, Wash.-based Paccar, Inc. (PCAR) has a long way to go to match TSLA’s size or popularity. However, PCARs proprietary electric vehicle models Kenworth and Peterbilt have become widely popular within a year of their launch. These EVs have been tested on tough terrains to establish their durability, with successful results. TSLA’s model X, in contrast, has been recalled for safety reasons, and is currently being probed by the National Highway Traffic Safety Administration (NHTSA).

TSLA has gained 783.9% over the past year, compared to PCAR’s 8.7% returns. In terms of six-month price performance, TSLA is the clear winner with gains of 246.1% versus PCAR’s 15.5% returns. TSLA has gained 42.8% over the past month, while PCAR has declined by 2.3%.

But which stock is a better buy now? Let’s find out.

Latest Developments

TSLA is set to join the S&P 500 index and S&P 100 index today. This comes following the spectacular performance of the stock over the past few quarters. TSLA has delivered profits for five consecutive quarters, which have supported its triple-digit price gains. In fact, the surging prices led to a 5-for-1 stock split earlier this year after CEO Elon Musk claimed the stock to be overvalued.

However, a leaked email sent by Musk to his employees earlier this month, shows rising concerns by management regarding the company’s low profitability and high costs, which could lead to a stock price decline if left unchecked.

To add to the company's concerns, TSLA vehicles are currently being investigated by the National Highway Traffic Safety Administration (NHTSA), after more than 29,000 Model X and Model Y vehicles were recalled in China.

TSLA is planning to launch three new electric vehicles in the near future, including the Tesla Cybertruck and two electric cars. It plans to invest up to $12 billion in electric vehicles and battery factories over the next two years, with manufacturing facilities on three continents. TSLA raised $4.97 billion through an at-the-market stock offering in September to fund its capital-intensive projects soon. The company is currently working on developing fully autonomous driving feature, which should be integrated in TSLA vehicles in some jurisdictions by 2021.

Also, TSLA is reportedly planning to launch its products in India in 2021. With a huge population (and market base), the planned expansion is expected to boost the company’s profits. TSLA also has plans to open a new battery system project in Australia, which has been dubbed as ‘Big Tesla Battery’. In this regard, TSLA has partnered with French renewable company Neoen to develop 300/450 MWh in South Australia.

New Market Sectors 

After successfully dominating the electric vehicle industry, TSLA is currently venturing into other sectors. The company’s acquisition of Solar city in 2016 has given it a smooth entry point in the solar panel manufacturing industry. CEO Elon Musk expects this segment to become the next “killer product” by 2021.

TSLA also joined the tequila business last month. On November 7 it launched its uniquely shaped tequila bottles through its official website, which sold out within hours.

Following the news release of Pfizer and BioNTech COVID-19 vaccine development success, Musk confirmed that TSLA became the manufacturing partner for German biotech firm CureVac and is currently developing RNA micro-factories and version three vaccine printers.

PCAR’s Kentworth T680 fuel cell EV and battery electric Peterbilt Model EV were the first class 87 zero-emission vehicles to travel to the Pikes Peak in Colorado. As an extremely tricky road to navigate, this accomplishment showcased the   performance and durability of PCAR’s EVs.

On December 3, PCAR declared a quarterly dividend of $0.32, along with an extra cash dividend of $0.70 payable next year.

Earlier in September, PCAR partnered with Faith Technologies and Schneider Electric to provide charging infrastructure solutions for PCAR vehicles across the United States and Canada.

Recent Financial Results

TSLA reported impressive results for the third quarter ended September 30, 2020, surpassing analyst expectations. Its EV deliveries have increased 7% year-over-year (subject to operating lease accounting) over this period. Revenue increased 39% year-over-year to $8.77 billion, while gross profit rose 73% from the same period last year to $2.06 billion. Its net income and EPS rose 131% and 69%, respectively.

PCAR’s revenues from the “Financial Services” segment rose 9.6% year-over-year to $397.60 million in the third quarter ended September 2020. Revenue from the “Parts” segment increased slightly from the year-ago value to $1.02 billion. Net cash from operating activities increased 14.1% from the same period last year to $2.19 billion for nine months ended September 2020.

Past and Expected Financial Performance

TSLA’s revenue and total assets have increased at CAGRs of 37.9% and 17.6%, respectively, over the past three years. PCAR’s revenue and total assets, in comparison, increased at CAGRs of 2.2% and 5.6%, respectively, over the same period. TSLA’s EBITDA increased at a CAGR of 165.7% over the past three years, compared to PCAR’s declining EBITDA over this period.

TSLA’s EPS is expected to increase 265.2% in the next quarter (ending March 31, 2021), 56.2% in the current year, and 67.7% next year. The consensus revenue estimates indicate a 59.8% rise in the next quarter, and 47.2% improvement next year.

Analysts expect PCAR’s EPS to rise 17.5% in the next quarter, and 44.2% next year. The company’s revenue is expected to rise by 6.6% in the next quarter, and 22.2% next year.

Both TSLA and PCAR have an impressive earnings surprise history. While TSLA beat the Street EPS estimates in each of the trailing four quarters, PCAR missed in one.

Profitability

TSLA’s trailing 12-month revenue is 1.46 times what PCAR generates. TSLA is also more profitable with a gross margin of 21.1% compared to PCAR’s 12.9%.

However, PCAR’s ROE and ROA of 14.1% and 4% compare favorably with TSLA’s 5.6% and 2.7%, respectively.

Valuation

In terms of trailing 12-month P/E, TSLA is currently trading at 1330.13x, significantly more expensive than PCAR, which is currently trading at 20.98x. TSLA is also more expensive in terms of trailing 12-month Price/Sales (22.66x versus 1.55x) and trailing 12-month Price/ Cash flow (151.48x versus 9.50x).

However, PCAR’s forward non-GAAP PEG ratio of 2.31x is 20.3% higher than TSLA’s 1.92x.

POWR Ratings

TSLA is rated “Strong Buy” in our proprietary POWR Ratings system, while PCAR is rated “Buy”. Here are how the four components of overall POWR Rating are graded for both these stocks:

TSLA has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade and Industry Rank. It is currently ranked #1 of 34 stocks in the Auto & Vehicle Manufacturers industry.

PCAR, in comparison, has an “A” for Industry Rank, “B” for Trade Grade and Buy & Hold Grade, and “D” for Peer Grade. It is currently ranked #12 in the same industry.

The Winner

TSLA has plenty of room to grow despite being the industry leader because the climate change pledge taken by most industrialized countries is expected to bolster the demand for EVs soon. Also, the company’s strategic manufacturing factory locations allow it to penetrate the largest markets efficiently and in a cost-effective manner. TSLA CEO Elon Musk has acknowledged the shortcomings of the stock with respect to low profitability and is expected to act soon. The company is currently planning to reduce its costs by upgrading its battery, making it more competitive in the industry. Thus, we think TSLA is the better pick here.

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TSLA shares rose $1.54 (+0.24%) in after-hours trading Monday. Year-to-date, TSLA has gained 676.73%, versus a 15.96% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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