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Tesla (TSLA) Signs Battery-Supply Agreement With China's CATL

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Tesla, Inc. (TSLA - Free Report) recently signed a battery-supply agreement with China’s largest battery producer, Contemporary Amperex Technology Co. Limited (CATL).

Though the agreement does not impose restrictions on Tesla’s purchase volume, the company will determine the battery-purchase volume between July 2020 and June 2022, as per its requirement.

Tesla expects to deliver at least 500,000 vehicles, marking a year-over-year increase of 36% in 2020. Therefore, the company is working toward securing battery-production capacity from several suppliers, since this rise in deliveries will require more batteries.

Last November, Tesla entered into a preliminary agreement of battery supply with CATL to procure cells for the company’s Model 3 cars, which will be manufactured in Gigafactory 3 in China. This news came in after Tesla’s relationship with Panasonic Corp. hit a rough patch, after the latter denied any plan to set up a battery-cell factory for the former in China.

China is the largest electric vehicle market in the world by a substantial amount, almost doubling that of the Unites States. Tesla's latest plant in China will provide the company direct access to this market and help slash costs significantly. In a letter to shareholders, Elon Musk said that this factory was 65% cheaper than any Model 3 factory built in the United States.

Tesla also signed an agreement last August with South Korea’s LG Chem Ltd., in order to source batteries for its Gigafactory 3 in China, which will provide the company with 21700 type battery cells to be used in Tesla’s Model 3 and Model Y cars.

The Gigafactory 3 started delivering cars last December and the company plans to diversify battery supplies for the plant in the upcoming days. Per Tesla, the company will work with both CATL and LG Chem, in addition to Tesla’s long-time partner Panasonic, to secure battery capacity for Tesla’s production ramp.

Shares of Tesla have outperformed the industry it belongs to over the past year. During this time frame, the stock has surged 142.7% compared with the industry’s rise of 36.2%.

Tesla is making efforts to improve vehicle deliveries, sequentially and annually, with some expected fluctuations due to seasonality. Due to the ramp-up of Model 3 in Shanghai and Model Y in Fremont, production will likely outpace deliveries this year. Both solar and storage deployments will be up at least 50% in 2020.

Zacks Rank & Stocks to Consider

Tesla currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Auto-Tires-Trucks sector include Gentherm Inc (THRM - Free Report) , Gentex Corporation (GNTX - Free Report) and SPX Corporation (SPXC - Free Report) . While Gentherm flaunts a Zacks Rank #1 (Strong Buy), Gentex Corporation and SPX carry a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gentherm has a projected earnings growth rate of 20.60% for the ongoing year. Its shares have gained 9.8% over the past year.

Gentex Corporation has an estimated earnings growth rate of 7.32% for 2020. The company’s shares have appreciated 45.8% in a year’s time.

SPX has an expected earnings growth rate of 8.09% for the current year. The stock has rallied 60% in the past year.

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