We hosted Tesla IR Martin Viecha for two large group meetings in NYC: Even Tesla bulls have been shaken by the sheer volume of recent noise in the system. So, it was good to look management in the eye and hear that Tesla is selling every car they can produce. Short-term, lower pricing has positively impacted US demand and Europe / China deliveries are brisk. Long-term, demand sustainability isn’t an issue in our view, given the fact that Tesla’s many advantages have led to vehicles now priced below comparable ICE competition and $20k+ below EV competition.
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General Motors disclosures should remind investors that GM has an interesting SOTP angle. While the 10K dropped language related to timing of Cruise Commercialization (we still expect this w/in the next 12-months), the company is clearly preparing for bigger things. Cruise employees and management are receiving Stock Options and RSUs that vest upon an IPO. On the negative side, GM also continues to disclose potential residual risks related to the bankruptcy of old GM (Plaintiffs want 30 MM additional shares for the GUC trust; GM will fight this at a March 11 hearing); The Takata recall could cost $1.2 bn (though GM is still seeking to avoid a recall).
Tesla announced Thursday (2/28/19) after market close that the long-awaited $35k Model 3 is now available in the U.S. No matter how you slice it, the Model 3 is now priced meaningfully below even base European luxury sedans, and not much above the overall US industry ASP of $33k.
We expect the US Dept of Commerce to release a report this weekend asserting that automotive-related imports are a national security threat, thus authorizing the Executive branch to enact tariffs without Congressional approval under the Section 232 statute. We think actual tariff enaction is unlikely given widespread opposition from U.S. constituencies (Auto Dealers are politically powerful; even the UAW has not offered its endorsement). Nevertheless, general uncertainty during the 90-day post-report evaluation period could have stock implications: Slightly negative for U.S. Suppliers, negative for U.S. Dealers and Aftermarket Retailers, negative for non-U.S. OEMs, and neutral for U.S. OEMs.
Tesla reported 4Q18 results on Wednesday (01/30/19) after the close. EBITDA of $1.12bn (15.4%) was above the $1.0bn per quarter we see as comfortably self-funding 30% annual capacity growth and debt settlements. Free Cash Flow of $910mln was also impressive. Both metrics were above consensus and serve as the second consecutive proof-point on sustainability of earnings.
Negativity on Tesla’s demand outlook has reached fever-pitch. Over the years, a variety of peak volume theories have proven incorrect. We strongly believe that the current version (reduction of the US tax credit and “the only buyers left want a lower-priced Model 3”) will again be wrong, and mgmt can provide enough evidence to drive upside in the shares. For 4Q18, we estimate Non-GAAP/GAAP EPS of $2.57/$1.45 (cons: $2.25 / $1.09) and auto gross margin of 24.5%, 100bp’s below 3Q18.
The document announced a 7% headcount reduction and indicated that Q4 GAAP net income would be positive but lower than Q3. Tone was sober, stressing that the company needs to focus on launching lower-priced versions of the Model 3 to “reach more customers who can afford our vehicles”. Understandably this reinforced market questions around near-term unit volumes and shares fell 13% on the day (likely exacerbated by high option expiry).
After 2.5 frenetic days at CES, we’d report the following key takeaways: 1) Multiple industry leaders are acknowledging (primarily behind the scenes) that deployment of Level 4 / 5 Autonomous Driving technology without safety drivers is farther away than most public targets. At the same time, demand for consumer-targeted safety / convenience systems (primarily Level 2+) continues to accelerate. 2) Reinforcement of the narrative that the next generation of high-volume internal combustion engine / transmission families will be the last one for many automakers.
Demand and Margin (i. e. pricing) concerns have driven a sharp change in sentiment since mid-Dec. These types of concerns have always proven to be unfounded, and we believe this will be the case again, as we continue to see TSLA as a high-conviction Outperform. Shares are down 15% since Dec 14 (vs S&P -4%) and back to levels directly post-Q3 results. At 12.6x the 3Q18 EBITDA run-rate, valuation is compelling given our belief that Tesla can grow volume at a 5-year CAGR of 30%+. We have raised our 4Q18 EPS forecast to $2.57 from $1.92, reflecting stronger than expected deliveries.
Most major U. S. OEMs and Suppliers will provide 2019 guidance in mid- to late-January… at our Detroit Auto Show Conference (Jan 15-16), or when they deliver Q4 earnings late January/early February. Management teams are pulling these forecasts together now. And they are doing so amid an unusually large number of market uncertainties (i.e. China, Europe, and NA production; company specific concerns for Ford (China, UK), JLR (China, UK), GM (discontinuing models), and local Chinese OEMs (declining at a double-digit rate in their domestic market). Based on our discussions with Industry Management teams we suspect that most will incorporate an extra dose of conservatism into their 2019 Guides. We are fine-tuning our estimates for Lear, Visteon, and Autoliv as we intend to take the same tack (e.g. today, we are fine-tuning our 2019 net new business backlog estimates, initially provided in early 2018, to reflect updated market and FX assumptions). See pages 3-6 for more details.
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