Tesla’s Surprise Profit Suggests Major Turning Point.
But Not Everyone Agrees A New Day Has Dawned, Yet.
“We continue to question sustainability and leave our target at $291”
“Are we nearly there yet? Nearly”
Tesla Inc investors reacted positively to the company’s surprise profit in the 3rd quarter, with many hailing the numbers as marking a new dawn for the upstart electric carmaker.
Tesla reported net income of $312 million in the 3rd quarter, the equivalent of $1.75 a share, compared with a loss in the same period last year of $3.70 a share. Sales jumped nearly 130% to $6.8 billion. The consensus among analysts was for a loss equivalent to 19 cents a share in the latest quarter.
Tesla shares were close to $314 just before the news broke on October 24, and had surpassed $333 towards the end of the month.
Some investors were not yet willing to say Tesla has turned the corner in its quest for success as measured by profitability.
“We continue to question sustainability and leave our (share price) target at $291,” investment bank Morgan Stanley said.
Morgan Stanley analyst Adam Jonas didn’t think the numbers were good enough to ward off the need to raise money.
“We continue to forecast a $2.5 billion equity capital raise in the 4th quarter. We note that company management stated they do not intend to raise outside capital, either equity or debt, at this time but noted this could change,” Jonas said.
Other investors were a little less inhibited.
Are we there yet?
“Are we nearly there yet?” asked investment researcher Evercore ISI. “Nearly,” was the reply.
Evercore ISI was impressed, and liked the 20% profit margin for Model 3 sales, but granted this might be difficult to maintain as average selling prices and mix declines. Evercore ISI also saw pressure to raise spending lessening a bit.
“Given Tesla sees limited need for incremental Capex to take production from 4,300 a week in the 2nd quarter to 7,000 a week in the future, operating leverage alone should prove a meaningful tailwind,” Evercore ISI analyst George Galliers said.
Investment researcher Jefferies talked about the 3rd quarter’s “detox” balance sheet.
“On all metrics, Q3 results comfortably beat the high end of consensus and quality looks rather good. Q3 materially de-stresses Tesla’s balance sheet and could support more leverage if the company can demonstrate more than one quarter of healthy FCF (free cash flow) generation and sustained demand for Model 3,” Jefferies analyst Philippe Houchois said.
Model 3 price crucial
Houchois said a capital increase couldn’t be ruled out, provided Tesla is not forced to cut the price of the Model 3 to induce sales.
The Financial Times Lex column said Tesla’s results exceeded all expectations, and more borrowing might be avoided.
“Higher margins on Model 3 vehicles, plus some accounts payable, helped to generate $880 million in free cash flow. If the next quarter throws off as much cash it will be able to meeting upcoming debt payments and keep a cash buffer of around $2 billion without going cap in hand to markets,” Lex said.
Even long-term Tesla critic and Wall Street Journal Heard on the Street columnist Charley Grant, was impressed in an article entitled “Tesla Hits the Bull’s-Eye”, saying this should at least reduce short-term fears over Tesla’s solvency.
“But before investors get too excited, a history lesson is in order. Tesla earned a profit and generated positive cash flow in the 3rd quarter of 2016. After that, the red ink returned for seven consecutive reporting periods,” Grant said.
Tesla still has $19 billion in debt and $3.5 billion in accounts payable on its books, Grant said.
Accomplishment for Tesla
“Tesla would be wise to take advantage of its surprising strong quarter to raise as much equity capital as possible given these obligations. Just being in a position to do that is quite an accomplishment for Tesla and (CEO) Mr Musk after a year of relentless drama,” Grant said.
But Morgan Stanley wasn’t so sure sunlit uplands await, and it was still possible that Tesla might fail.
“While we acknowledge the significance of Tesla’s very strong Q3 result, we do not believe investors will assume the company is fully self-sufficient without a more sustained period of execution,” Morgan Stanley’s Jonas said.
“We are increasingly of the view that the confluence of economic, competitive, regulatory, political and technological forces may potentially challenge Tesla’s status as a stand-alone entity,” Jonas said.