Tesla Inc. TSLA shares have been languishing despite the company’s fundamentals improving ever since it reached a low amid the COVID-19 resurgence in China in April.
Future Fund’s Gary Black on Thursday sent out an open letter to Tesla’s board, recommending measures to lift the sagging stock.
Grossly Undervalued: Tesla stock is now trading at its lowest P/E ratio since COVID-19, at 37 times the estimated earnings per share for 2022, Black noted. This is despite the company operating from a position of “outstanding financial strength,” he added.
The company now has an investment-grade credit rating in place, the analyst said.
Tesla had $18.9 billion in cash and marketable securities and debt as of Jun. 30, 2022, and is on track to generate free cash flow of $20 billion after deducting all capital expenditure in 2023, he added.
Black Recommends Buyback: Black urged the board to consider an aggressive multi-year stock buyback for at least $10 billion.
“We believe now is a unique opportunity to buy your stock at well below our estimate of $550/share intrinsic value,” the fund manager told the board.
“When short-term noise is depressing shares, as is happening now, Tesla management can buy back more shares,” he added.
The pace of buyback can be slowed when the stock price rises, Black said, adding that most big techs, including Apple Inc. AAPL, Alphabet Inc. GOOGL GOOG and Microsoft Corporation MSFT have employed this buyback strategy consistently for years.
The fund manager also said the buybacks will unlikely have any impact on the company’s financial flexibility. Buybacks may be preferred to dividends by Tesla shareholders as this shareholder return policy has a favorable long-term capital gains tax treatment, he said.
From the company’s perspective, buybacks can be managed opportunistically unlike dividends that are fairly rigid once put in place, Black said.
Black’s actively-managed Future Fund Active ETD FFND has Tesla as its top holding, with the EV maker’s stock accounting for close to 11% of its portfolio.
Price Action: Tesla stock closed Thursday’s session 2.06% higher at $221.72, according to Benzinga Pro data.
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