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Tesla Motors: Price Increases Could Aid Margins

 December 02, 2012 09:14 PM


(By Mani) Tesla Motors, Inc. (NASDAQ: TSLA) raised prices over the entire Model S line-up by $2,500, effective for any new reservations after Jan 1, 2013, a move that could help the electric automaker meet the margin targets.

Model S is the world's first premium sedan that is built from the ground up as an electric vehicle, featuring Tesla's powertrain. Model S offers 40 kWh, 60 kWh and 85 kWh battery options. All deliver unprecedented range, with the 85 kWh variant achieving an EPA-certified range of 265 miles.

The latest action represents a 2-4 percent price increase across the line-up, which is now priced from $59,900 - $112,100 in the U.S. (depending on battery size and options). This pricing action has been widely expected over the last week or so and is in-line with general expectations.

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"At the end of the day, the major driver of Tesla's share price will be profitability, which will be driven by volume, mix, pricing, and cost/margin. We don't believe this price increase will have a significant impact on demand (which is likely to exceed Tesla's ability to produce for the near to intermediate term)," Deutsche Bank analyst Dan Galves wrote in a note to clients.

Meanwhile, other major automakers have been increasing prices by at least this amount over the past few years. During the past three years, most automotive companies had at least three price increases while general inflation (CPI) increased 8.75 percent.

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A straight 8.75 percent CPI increase now yields a base price for Model S of $62,400, an increase of $5,000. Tesla says it is increasing its prices only half that amount, giving Model S a new base price of $59,900 before federal tax credits

Moreover, the move should increase the probability that the company could meet their 25 percent gross margin target and give some relief to Street, which had been concerned over Tesla's margin prospects given their operating expenses have increased significantly.

"This move (price increase) could help address this concern," Galves said.

Tesla has stated a low-to-mid teen's EBIT margin target. Based on a high-$80k average selling price globally, 25 percent gross margin, $100 million powertrain revenue, Tesla could achieve 12 percent margin on 37k units.

"If this price increase assists in moving gross margin up to 27% (for instance), we expect that 12% margin can be achieved on 32k units. We'd note Tesla's most recent volume target was 30k-35k units (once Model X is being produced at scale, likely sometime in 2014)," Galves noted.

Palo Alto, California-based Tesla designs and manufactures EVs and EV power train components for partners such as Toyota and Daimler. Tesla has delivered more than 2,400 Roadsters to customers worldwide. Model S began deliveries in June 2012.

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