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On Oct 3, Zacks Investment Research downgraded Tesla Motors, Inc. (TSLA - Analyst Report) to a Zacks Rank #2 (Buy).

Why the Downgrade?

Tesla has witnessed sharp decline in share prices since a video showed its Model S catching fire near Seattle, WA on Oct 2.

Tesla’s shares dropped 4.2% to $173.31 yesterday and it declined 6.2% to $180.95 the day before, as the news sparked investors’ concern about the company’s sales getting a hit. Investors were worried that Model S sales may decline if the fire resulted from any defect in the company's battery packs. The company’s share price was also affected by a downgrade in Tesla’s recommendation to Neutral from Outperform by R.W. Baird.

However, we remain optimistic about Tesla based on its expansion in Europe and China together with better performance in the second quarter of 2013. The company started taking bookings of Model S recently. While Model S caters primarily to the affluent class in China, it is also expected to be popular among the environmentally conscious consumers.

Tesla is also expanding in Europe with a new assembly plant. The company inaugurated its 18,900-square meters Tilburg Assembly Plant in Netherlands for Model S. The plant will be the final assembly and distribution center for all Model S cars to be marketed in Europe.

The plant will also serve as the European service and parts headquarters of Tesla. The automaker selected this location because of its good connectivity with all important markets in Europe via rail and motorway network.

The Palo Alto, CA-based automaker logged a loss of $30.5 million or 26 cents per share in the second quarter of 2013 lower than a loss of $105.6 million or $1.00 per share recorded in the year-ago quarter.

Barring one-time items other than stock-based compensation expense, Tesla’s earnings were 5 cents per share in the quarter compared with the prior-year loss of $1.00 a share. That compares favorably with the Zacks Consensus Estimate of a loss of 36 cents a share.

Revenues jumped manifold year over year to $405.1 million in the quarter from $26.7 million a year ago, beating the Zacks Consensus Estimate of $395 million.

Over the last 60 days, the Zacks Consensus Estimate for 2013 increased significantly to earnings of 21 cents per share from prior estimate of a loss of 68 cents. For 2014, the Zacks Consensus Estimate improved 214% to $1.57 per share over the last 60 days.

Other Stocks to Consider

Other major automobile stocks worth considering are Nissan Motor Co. (NSANY), General Motors Co. (GM - Analyst Report) and Ford Motor Co. (F - Analyst Report). Nissan carries a Zacks Rank #1 (Strong Buy), while the other two stocks carry a Zacks Rank #2 (Strong Buy).

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