I think there’s a FTSE 100 stock that looks like a better investment than Tesla (NASDAQ:TSLA) for the next 10 years. The stock is Unilever (LSE:ULVR).
For an investor, the equation is simple – Tesla is six times as expensive as Unilever, so is it going to earn six times as much cash over the next decade? My answer is ‘no’.
Investment returns
As Warren Buffett says, investing is about making predictions about businesses, not stock prices. Investment returns come from a company’s earnings, not share price increases.
In other words, evaluating a business as an investor involves comparing how much it costs with how much cash it will produce. It’s not about predicting what its share price will do.
The amount an investor has to pay is measured by the company’s market cap. That’s the value of the entire business implied by the current share price.
Tesla’s market cap is around £605bn ($761bn). Unilever’s market cap is much smaller, at around £99bn ($125bn).
Since Tesla is six times bigger than Unilever, it needs to generate six times as much cash in order to be a better investment. So how likely is this?
Cash flows
At the moment, Unilever generates around £4.78bn per year in free cash. With a £99bn market cap, that’s an annual return of 4.8%.
Tesla currently generates roughly £6bn ($7.55bn) in annual free cash. That’s roughly a 1% return on an investment at today’s prices.
Obviously, though, the equation isn’t so straightforward. Unilever’s business is best described as steady, whereas Tesla is growing rapidly.
If Unilever’s annual cash flows grow at 2% per year on average over the next decade, the company will produce £53.4bn. That’s the return for investors.
Since Tesla is currently six times as expensive, it needs to generate six times the returns. So it will need to produce around £320bn ($403bn) in free cash.
From a starting point of £6bn, this implies an annual growth rate of just under 30% per year. I see this as a lot, and I think it’s unlikely.
Which stock to buy?
As an investment, I see Unilever as a better bet than Tesla for the next decade. I think the FTSE 100 stock offers a better return over the next decade.
Tesla obviously has better growth prospects. It’s expanding its production capacity and signing deals to allow Ford and General Motors to use its charging stations.
But it looks to me as though the company is going to need all this and more to justify its current market valuation. And that’s a challenge.
With Unilever, there’s a risk its growth might look anaemic if interest rates rise much further. But I think it’s future cash flows fo the next decade are better value than Tesla’s.
Ultimately, I’m more confident Unilever can grow at 2% than I am that Tesla can achieve 30% annual growth. So I’d buy Unilever over Tesla for a 10-year investment.
