The Next Hottest Store at the Mall?

I was at the local mall last week and where there was once a vacant sign stood a new and vibrant looking clothing store called Lululemon Athletica (NASDAQ: LULU).  As soon as I walked by I was intrigued but the store wasn’t quite finished so I couldn’t go and explore.  After returning home I began to research and found some very interesting things.  You may want to do some research yourself on top of reading this article but here is what I found: the company itself seems to be headed for fantastic success, and yet the stock is already priced so high because of that I needed to dig deeper before making any decisions myself.

The main question, and one that “value” investors must grapple with quite frequently, is how much they are willing to pay for the current growth. The trailing P/E ratio is – pretty ridiculous no matter which way you look at it.  When you look at the forward P/E, based on estimates, it is 37, which is still higher than I usually like, but much more reasonable for a rapidly growing company.  The quarterly earnings growth has been around 35% and typically I like to see growth and P/E hovering around the same number so that looks even better.  Earnings per share, which I always think is a valuable metric when looked at over time, has gone up in accordance with the stock price in recent years so that again is a solid sign.  Another plus is that the company has no shadow of debt hanging over it to suck up future assets.

Their historical profit margin is amazing and has been around 20% for the last few quarters. Compare this to an industry average around 5%. This is impressive but it is questionable if that is sustainable. It is obvious that the reason they have such a high margin is because of high prices and as competitors, such as Gap (NYSE: GPS) with their new Athleta brand, gain in popularity it may carve into Lululemon’s profits.  Their male side has not seen nearly the growth of their female lines, mainly due to the popularity of brands such as Under Armour (NYSE:UA) which are solidly entrenched in the male sport and athletic clothing arena.

The numbers always have their own story to tell and it is one that you must listen to, but with potential huge success stories you can never get buried in the numbers, you need to look at the bigger picture. Lululemon Athletica is a brand name that has a lot of respect because of their quality.  The stock has exploded since they went public in 2007 but in my opinion they still have a lot of room to grow and here is why.  Though they compete with companies like Gap and Under Armour, they run the majority of their stores in typical malls, and so it is valid to compare them to other mall retailers.  LULU has 180 stores in the US and Canada compared to 450 for Hollister and 350 for Abercrombie and Fitch (NYSE: ANF).  They have a large potential market along the west coast and the southern US and their online sales are a large and growing component of their total.  Don’t forget about international expansion potential.  So there is room for growth but even beyond that the company has something beyond just a brand name, they sell a lifestyle and the lifestyle they sell is extremely popular with their customer base.  This gives them a good deal of protection against companies such as Nike (NYSE: NKE) who may have a larger store base, more selection, and an established name.  So while Wall Street may be enthusiastic about this company there is still reason to be excited.

If you have any yoga pant wearing friends ask them if they have heard of Lululemon and what their experience with them has been like.  That’s one of the best insider views you can get.  Beyond that, find one near you and check the store out for yourself or take a look at their website.  When it comes down to it I cannot pay this much for the company right now, but the possible growth still makes it enticing and I will surely have it on my watchlist.  Wall Street does some foolish (lowercase F) things and if it decides to bring this stock price down I might have to jump on.  I see a lot of potential in the underlying company.

Auto Industry to be Shocked by Tesla?

I know you’ve probably about had it with cheesy electric car titles but at least it grabbed your attention.  Tesla’s stock has surged the last two days as the electric car maker was upgraded to a “buy” by a Wall Street analyst from Wunderlich Securities.  Now usually I am not one to suggest a buy position after Wall Street and the major institutions jump on board but that isn’t yet the case.  There are plenty of naysayers still doubting the young company.  And for good reason too.  Tesla Motors (NASDAQ: TSLA) has not yet made a profit and has not truly made a long-term product just yet.  Despite this one condition I think that Tesla may be a great stock for the next 2-5 years.

For a quick history of the company it was founded in 2003 by Elon Musk of PayPal and SpaceX fame.  The goal of the company is to create quality electric cars for the average person.  They started this mission off with the high end and high performance Tesla Roadster. With a $109,000 price tag and capable of 0-60mph in under 4 seconds it isn’t your grandparents electric car.  After selling over 2,000 and getting their name out there to the right crowd Tesla set its sights on a larger market.  The luxury Model S sedan (you have to check out some of the photos) is their next step.  It already has 8,000 pre-orders and is scheduled to ship this summer.   Their next vehicle, based on much of the same technology, is the Model X, a crossover expected to come out in mid-2013.  These are all building up to their goal of making a mass market, competitively priced, quality electric car which is still a few years off – though the announcement of a $30,000 model is due before years end.

So with an exciting story in the making is this all just a fairy tale that is never to be fulfilled?  It comes down to three main questions.  Will they stay on schedule and actually manufacture the cars?  Will the cars sell?  Will Tesla become profitable?  First off the company has a number of debts and if they have many delays it may be too long before it becomes profitable and its creditors could swallow it.  Luckily for Tesla they were able to buy a huge manufacturing plant in Fremont, California from Toyota (NYSE: TM). Toyota and GM went in on a joint manufacturing center in 1984 and had to pull out in 2010 due to cuts in production – giving Tesla a great facility at a bargain price.  Additionally the plant is almost outfitted with all the equipment that Tesla needs to begin production.  One of the main reasons that Wunderlich Securities upgraded Tesla to a buy rating was that they were impressed with the facility and Tesla’s progress.

As far as their ability to sell, the cars are priced at $49,500 after a tax break of $7,500 which puts them above a lot of consumers.  Despite this price Taylor Anderson at SeekingAlpha writes that less than 1% of the top 1% in the US needs to buy a Model S for them to meet their goal of 30,000 in the next two years – even less if international sales are strong.  Additionally for consumers looking for a high end luxury car this is not an unreasonable cost.  It is less than a medium range Lexus of comparable quality.

Finally, and the most important:  will Tesla Motors become profitable?  They have yet to make a profit but Elon Musk expects to break into the black in mid-2013.  Besides the Roadster, the company’s main source of revenue has come from the sale of powertrain components to larger companies such as Toyota and Daimler.  It has to make a profit in its Model S and Model X vehicles to survive and the company plans to do just that.  With 8,000 pre-ordered (on refundable deposits fyi) and a predicted 30,000 for the next two years, with the analyst from Wunderlich Securities saying that the car can “sell itself” and stating that he could easily see them selling 5,000 a quarter, the company seems set to reach its first goals.  Once these cars are on the road and Tesla proves that it can manufacture in larger quantities more orders will come in and the stock will likely follow in the footsteps of the company’s success.

Yes there are a number of questions Tesla has yet to answer:  will electric cars gain in market share, do American consumers really want electric cars, will a large company come in and strangle them, will they be overtaken in technology by another company.  But Tesla is planning on answering these questions through action.  The company has begun to build a great reputation and its visibility is growing daily.  The Chevy Volt from GM (NYSE: GM) has been trying to beat out Tesla but they have not been met with much success.  Another supposed competitor, the Toyota Prius, isn’t currently even in the same market with Toyota shooting for lower end consumers.

With some amazing vehicles and technology, a passionate management, and a dedicated CEO as one of the major shareholders, Tesla Motors is out to prove the doubters wrong and I think they have a shot.  Not only do I think they have a shot but I think it could be a great opportunity for investors if they get in now.  The company makes an environmentally sustainable product but it has not yet proved that it is fiscally sustainable and until then it will understandably be a gamble that everyone is not willing to take.  If you are interested I encourage you to do some more research (Fast Company did a great overview of the company), take a look at Tesla’s website and their cars, maybe even try to visit a dealership, and make an informed and independent decision.