Tesla Motors has outsize goals for 2013, including selling ten times as many cars as it did in 2012 and transforming its 2012 loss into a profit. But the company’s earnings quality remains weak.
It may be a while before you spot a Tesla Motors (TSLA.O) automobile driving down your street or parked in your neighbor’s garage, given that the high-performance Model S retails for a hefty $87,000. True, the forthcoming Model X, an SUV version of Tesla’s pioneering all-electric automobile, is likely to make its debut at some point next year, with rumors surfacing in recent days that a cheaper version of the Model S, priced at closer to $30,000, may become available a few years from now. Still, the only way that Tesla will be able to generate sizeable sales is to cut its price, and that will only be possible if the company is able to reduce its costs dramatically. Given that Tesla Motors already scores poorly and almost every StarMine model, including the StarMine Earnings Quality (EQ) Model which attempts to measure the sustainability of a company’s earnings in the coming quarters, the conundrum is clear.
Indeed, Tesla Motors last year reported that 10%, of its sales came not from the sale of cars but from selling pollution credits to other automakers. There are now a dozen states nationwide, including California, that require a portion of the vehicles sold within their borders to emit zero pollutants. A car maker producing more zero-emission vehicles than that minimum can earn credits, which can then be sold to others that aren’t producing enough zero-emission cars. Tesla, whose total sales hit only 2,650 vehicles last year, isn’t delivering enough cars to have to meet the standards, but it still is entitled to collect a credit for every electric car it sells. The proceeds from these sales of ZEV credits have soared to $40.5 million in 2012, from $2.8 and $2.7 million in 2010 and 2011, respectively, as Tesla’s output has increased. But this is hardly a stable source of revenue or profits, particularly as Tesla’s larger rivals ramp up their own production of more affordable zero-emission automobiles, such as General Motors’ (GM.N) Chevy Volt and the Leaf, introduced by Nissan (7201.T).
As production rates increase, the value of ZEV credits will fall. For now, at least, they continue to artificially inflate the company’s margins, which would have been far lower than the already very weak -30% in Tesla’s fourth quarter had the company not been able to consider these credits as revenue. Even so, the gain only partly offset other factors that weighed on margins, ranging from hefty overtime payments to employees and temporary workers as well as higher shipping and component costs.
While Tesla has said it expects those costs to fall dramatically in 2013 and to ship 20,000 cars to buyers over the course of the year, the company will have to execute flawlessly. Accepting these targets requires an element of faith on the part of potential investors, given that Tesla sold only slightly more than half of the 5,000 vehicles it had said it would last year. The company reported a loss of $3.20 a share for 2012, larger than the loss of $2.21 it announced in 2011, and while the size of that loss may shrink this year, predictions by Tesla itself that the company may turn a profit in 2013 may strike the critical observer as ambitious.
Source: Datastream Professional / StarMine
Despite the fact that the company is taking in cash from these sales to help offset the its capital spending costs and the lack of profitability on those vehicle sales it did complete, the ramp up in production of the Tesla Model S, the company’s cash flow from operations is in negative territory and in the fourth quarter of 2012 its capital spending totaled more than $40 million. Clearly, those aren’t being funded from Tesla’s operations, which generated negative cash flow of -$60 million, as can be seen in the chart above. This level of capital spending isn’t sustainable in the long run unless the company’s operations can generate cash and not simply consume it. Moreover, as sizeable as Tesla’s losses are, they are exceeded by its negative free cash flow, as shown by the red portion of the bars in the chart above on the right . All of these are hallmarks of poor earnings quality.
The company also consistently has reported a pro-forma version of their earnings that excludes the impact of stock options. When filing its financial results with the SEC, however, Tesla has had to recognize these costs under GAAP accounting rules and, as the chart below illustrates, these GAAP-compliant earnings have consistently lagged the pro-forma reports the company has published in its press releases. Given that Tesla Motors is a startup company and that its senior executives may well be earning much of their compensation in the form of equity or stock options, these expenses could well prove to be a recurring expense and the GAAP-compliant earnings may well offer the most accurate picture of the company’s profitability. Certainly, in the long run, GAAP earnings trends tend to prevail.
Source: Datastream Professional / StarMine
A scathing review of the Tesla Model S and its battery life was greeted with furious denials by Tesla’s co-founder and CEO, Elon Musk (who made billions from the creation and sale of iconic Internet payment systems facilitator, PayPal). But the problems confronting Musk and Tesla may well stretch beyond the dispute over the battery life of the Model S. The concept of zero-emissions vehicles is clearly the direction in which automakers are moving, but while Tesla’s products have been innovative, a large question mark still hangs over its head with respect to its ability to generate sustainable earnings.
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