Tesla Motors and New Flyer As Possible Representative Peers

Tesla Motors and New Flyer As Possible Representative Peers

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Tesla Motors and New Flyer As Possible Representative Peers

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Student 1

To: Chief Executive Officer, Proterra

From: Kenneth Nead, Financial Director, Proterra

Date:28 April 2022

Subject: Tesla Motors and New Flyer as possible representative peers

As the company finalizes its transition from being privately owned to a public corporation, this memo will aid in determining whether companies like Tesla and New Flyer could prove beneficial as peers. This memo will also cover the issues that arise with using an SML approach to determine Proterra’s cost of capital.

Peer Applicability

The pure-play approach involves using a WACC unique to a particular project based on companies in a similar line of business (Ross et al., 2019). Proterra business is focused on developing the “bus of tomorrow,” in essence, an electric bus. Tesla is focused on creating high-performance electric vehicles and stationary energy storage units. New Flyer is North America’s heavy-duty transit bus leader that offers clean diesel, natural gas, diesel-electric hybrid, electric-trolley, and battery-electric. Although both of these companies dip their toes into what Proterra is looking to create, neither directly operates in our realm of business. Yes, Tesla makes electric vehicles, but its focus is on high-performance cars that will have different costs than manufacturing buses. New Flyer’s business is centered on buses and heavy-duty transit, but they also have expenses and cash flows associated with their diesel-fueled vehicles. Another critical point is that both of these companies will be considered large-company stocks because they have millions of outstanding shares in circulation. When Proterra goes public, it will like to be regarded as a small-company stock. Based on Capital Market History, we are likely to see higher average returns and higher risk premiums (Ross et al., 2019). I don’t believe Tesla or New Flyer could be considered good examples as peers, but aspects of their businesses could be applicable.

Problem with SML approach

The SML is a graphical representation of the relationship between systematic risk, represented by beta, and the expected return (Kenton, 2022). The two main advantages of the SML approach are explicitly adjusting for risk and applying to companies other than ones with steady dividend growth (Ross et al., 2019). However, SML has drawbacks that need to be kept in mind when creating Proterra’s benchmarks. The SML approach needs two estimated components, market risk premium, and beta coefficient. Should either of these estimates be poor, the resulting cost of equity will be inaccurate (Ross et al., 2019). Another critical issue is that Proterra does not have any past public performance. The SML approach relies heavily on past performance to predict future performance. This is why finding companies with similarities like Tesla and New Flyer, although not perfect pure-play peers, would be needed to create accurate benchmarks. Even with finding applicable peers, Economic conditions can change swiftly, making past performance not indicative of future performance. The straightforward example of how COVID affected airlines. No past performance could have predicted the drastic shift COVID caused for the travel industries. These issues must be at the forefront of our minds when creating the benchmarks for Proterra.

References

Kenton, W. (2022, March 29). Security Market Line. Investopedia. Retrieved from https://www.investopedia.com/terms/s/sml.asp

 (Links to an external site.)

Ross, S. A., Westfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.

Student 2

MEMO

TO: CEO

FROM: Shannon Curtis, Finance Manager

DATE: April 27th, 2022

Re: Pure Play Peer Evaluation

Proterra is renowned for their forward-thinking strategies and driving the industry to the technologies of the future. With many successful market introductions, we continue to see growth and our position in the market strengthening, however, that does also have a high cost associated with it. In order to understand if our cost of capital is suitable, we can use peer companies as benchmarks for their cost of capital comparisons. A pure play approach would be to focus on other competitors that also specialize in world-leading vehicles that are powered off of clean domestic fuels, to help benchmark Proterra’s weighted average cost of capital (WACC) (Fernando, 2021). The firms Tesla Motors and New Flyer have been used to compare Proterra and use to support the pure play approach.

From a pure play perspective, even though both Tesla and New Flyer both play in the advanced technologies of clean vehicles market segment, they are not both created equally from an applicable benchmark standpoint. Proterra focuses primarily in heavy duty public transit sector of the market. Not only with alternative fueled buses, but with advanced power, charging and routing solutions to further enhance the public transport sector. Proterra is US based, and currently privately owned, looking to go public. Tesla on the other hand specializes in high-performance fully electric vehicles and chargers worldwide. Teslas heavily invested in R&D which requires them to need to have a large amount of capital to sustain these initiatives. New Flyer is the leader in the public transit in North America with their clean diesel and natural gas offerings. Given the areas of specialty, based off the relative applicability approach New Flyer would be the better company for Prottera to align with given their segment of the market is more centralized to North America, and they both play in the energy efficient segment offering of public transportation buses.

Another approach that could be used to determine WACC is the Security Market Line (SML). The SML is an upward sloping liner line that plots the expected return, against market or systematic risk (Excelsior College, 2022). The SML is a graphical representation of the capital asset pricing model, and can help to determine if an investment product is expected to offer a favorable return compared to its level of risk (Kenton, 2022). There are some risks associated with this approach such that it uses values of the market risk premium and the beta coefficient to be estimated. Not only are they estimated but the estimates are derived from past performance to help determine future performance. This approach is not ideal in markets that utilize advance technologies, or that are rapidly changing and evolving.

As we conclude our peer play approach evaluation, it is recommended that Proterra should utilize the industry leader, New Flyer, as the organization that will be a positive industry role model for its cost of capital estimates.

Tesla Motors and New Flyer As Possible Representative Peers

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