ELIO MOTORS IS BEING ATTACKED BY ELON MUSK AND HIS FAKE NEWS AGENTS
By
Steven
Ralston,
CFA
Elio
Motors (ELIO)
is in the process of designing, developing and soon-to-be
manufacturing an ultra-efficient, low-cost, three-wheeled,
two-person
vehicle. With
attractive
performance, safety, fuel economy and aerodynamic styling
characteristics, the Elio has
the potential to become a game-changer leading to broad market
acceptance of economical, three-wheel vehicles. Strong
current demand is reflected by over
64,000
customer reservations.
Management anticipates assembling the 100 S1 prototypes for
real-world evaluation during 2017 with commercial mass production to
follow in 2018.
Since
the beginning of November 2016, Elio’s stock has been pressured by
a variety of factors, specifically by the conversion of Convertible
Subordinated Notes into common stock (and subsequent sale of some of
that stock), the announcement that commercial production is now
expected to commence in 2018 (rather than prior expectations of late
2017) and a series of articles in early January that highlighted the
normal cautionary factors of a start-up company like Elio Motors,
along with an inflammatory comment about a certain hearing
date.
First,
the Elio’s stock has succumbed to a wave of selling pressure from
the stock issued as a result of the conversion of Convertible
Subordinated Notes into common stock. As of the latest filing
(November 18, 2016), 109,505 shares have been issued at a conversion
price of $5.98. Since then, we estimate almost another 100,000 shares
have been issued at the same cost. These
200,000+
shares created a stock overhang.
Many of these former bond holders obviously chose to lock in profits
in $19-to-$12 range during November and December as average daily
volume increased over 150% from 3,700 to over 10,000 shares, and
increased again to over 20,000 shares daily in January 2017.
Second,
on December 31, 2016, the company indicated that consumer
production
was now being targeted to start in 2018.
Previously, commercial production had been anticipated by
the end of 2017. Though the push out is somewhat disappointing, it is
not totally unexpected. The projected timetables
relayed by managements of small cap stocks are almost always overly
optimistic. Intensifying the issue, Elio Motors is in the process of
developing and bringing to market a high-ticket consumer durable
product that not only is fraught with complex design and development
challenges, but also is required to meet stringent governmental
operational and safety requirements. As long as progress is being
made with the E-Series vehicles, minor delays in the timetable for
commercial production are not overly concerning. Better to ultimately
produce a safe and efficient vehicle than increase the risk of future
potential recalls.
Third,
during the first week of January, many news sources, including local
media channels in Shreveport, reported that the company’s
accumulated deficit was over $123 million (as of September 30, 2016),
insinuating that it was debt and also cited that the going concern
accounting language requirement in the 10-Q was fact rather than
cautionary. Companies bringing an initial product to market always
incur start-up costs and an initial accumulated deficit, which
represents the accounting measurement of the costs incurred for
engineering, research and development. In general, the greater
the price of the product results in a larger the accumulated deficit.
For example, Tesla (TSLA), the developer of fully electric vehicles,
first started generating revenues in 2007. At that time, Tesla had
incurred an accumulated deficit of $122 million and was operating
with a working capital deficit of almost $29 million, and in the
following year the deficits expanded to $205 million and $56 million,
respectively. Interestingly,
Tesla’s
latest 10-Q implies that Tesla will have going
concern
accounting language in its 10-K for the year ending December 31,
2017.
Further
exacerbating the concerns, the media falsely
reported that
Elio Motors had missed attending a pre-hearing meeting with the
Louisiana Motor Vehicle Commission on January 9, 2017. Elio
Motors has put out numerous communications stating that the Louisiana
DMV had not notified the company that its attendance was
requested.
These
news articles (along with the announcement that commercial production
is now expected to begin in 2018) weighed heavily on the company’s
stock, pressuring it down to the $6 range, after which it rebounded
to $10 before closing at $8.50 on Friday.
On
the other hand, do not under-estimate the importance of future
financings to the ultimate success of Elio Motors. Management
anticipates
that between $275 million and $300 million will be needed
to start production.
Thus far, management has been able to successfully finance the
start-up of Elio Motors. During the first nine-months of 2016, over
$17.2 million was raised through financing activities, including $5.8
million released from restricted cash, almost $5.3 million from
customer deposits, $3.7 million from the issuance of common stock and
$2.45 million through advances by related parties. In addition, the
Regulation A+ offering closed providing $16.92 million.
Elio
Motors has submitted an application for an Advanced Technology
Vehicles Manufacturing (ATVM) loan for approximately $185
million. The first of four stages has been completed with the
Department of Energy confirming that the technical criteria for the
loan have been achieved. As part of the evaluation of the loan
application, the DOE requires that Elio Motors demonstrate
market
acceptance for
the Elio project.
Under revised guidelines that clarify the approval process (which
became effective June 24, 2016), the evaluation of market acceptance
for start-up companies must “establish to a high level of
confidence that adequate future sales will occur.” Specifically,
“in all but the most extraordinary circumstances, market studies
and non-binding customer reservations to purchase vehicles will not
be sufficient to establish adequate future sales.”
Though
management believes that the company’s crowd funding and
Regulation A+ offering qualify as “most extraordinary
circumstances,” to further strengthen the case for the ATVM
loan program, the company embarked on an effort to seek binding
commitments to
purchase the Elioat
a locked-in price to further validate market acceptance of the
vehicle. Hence, the motivation to set a base price of $7,300 and
the incentive ofa 25%
discount on
their deposit amount toward the final purchase price for those who
make a binding commitment.
To
date, the ATVM loan program has provided loans to Ford ($5.9
billion), Nissan ($1.45 billion) and Tesla ($465 million). However,
if Elio Motors is unable to obtain an ATVM loan, management
anticipates funding the company through customer reservations, debt
and/or equity offerings and possibly CAFE credits. The company
has also identified approximately $1.1 in equipment at the
Shreveport plant that it is authorized to sell to raise funds. It
should be noted that the company’s reservations represents over
$500 million in revenues.
Elio
Motors began accepting reservations in January 2013. Reservation
deposits, which secure vehicle production slots, range from $100 to
$1,000 at four levels ($100, $250, $500 or $1,000). Reservations are
offered on a non-refundable or refundable basis with non-refundable
reservations have priority over refundable
reservations. The reservation deposits have provided
significant short-term liquidity for the company. The number of
current reservations is 64,008
customer
reservations.
A
sales discount equal to 50% of the nonrefundable deposit up to $500
per deposit was offered by Elio Motors through May 31, 2016.
Thereafter, the discount was set at 25%. Then, on August 12, 2016,
the base price of the Elio was set at $7,300 for non-refundable
reservation holders until the number of total reservations reaches
65,000 vehicles. The 25% discount of the deposit amount will be
applied at the time of the customer’s purchase of a vehicle.
Due
to cyclical characteristics of the automobile and motorcycle
manufacturing industries, the valuation methodology that consistently
has been applicable over time utilizes the Price-to-Sales
(P/S)
metric. During
the up-cycle, profitability (P/E) and cash flow (EV-to-EBITDA and
P/CF) approaches tend to overstate the potential of these personal
transportation vehicle companies. Conversely, during the down-cycle,
negative profitability and, on occasions, negative cash flow causes
methodologies based on P/E, EV-to-EBITDA and P/CF to become
meaningless.
The
mature automobile companies (General Motors, Ford, Honda, Toyota, BMW
and Daimler) tend to trade at low P/S ratios, in the 0.1 to 0.8 range
with a mean valuation of 0.4 times sales.
A
new entrant in the early phases of its life cycles, like Tesla
(TSLA), trade at a much higher multiple reflecting the company’s
potential. As Tesla ramped up sales to the $204 million level in
2011, its stock traded at 13.9 times sales. Subsequently in 2013,
when sales reached slightly over $2.0 billion, the P/S valuation of
TSLA was 10.3. Elio
Motors with its high growth opportunity is similar to the new entrant
comparable.
Since
Elio Motors is on the cusp of generating revenues through the sale of
the S1, and more importantly, will then be on the threshold of mass
commercial production (with over 64,000 reservations in hand), we
estimate that in a few years, the annual run rate of the company’s
Shreveport plant could approximate 200,000 vehicles with an estimated
average sales price of $8,500. Utilizing annual sales of $1.6 billion
and with the expectation that Elio Motors can attain a P/S ratio of
5.0 at that time, the share price target would be $151 in 2022.
However, to translate that value to a current target price, a
net present value (NPV) calculation indicates
a
share price target of $49.