October 24, 2018 / 2:47 PM / a year ago

UPDATE 2-Tesla may post profit with Model 3 surge, investors look for more

(Adds link to graphic, updates shares)

By Alexandria Sage

SAN FRANCISCO, Oct 24 (Reuters) - Chief Executive Elon Musk may post a long-promised profit when Tesla Inc reports third-quarter results later on Wednesday, as production of the Model 3 electric sedan takes off, but investors will want to know if such results are sustainable.

Tesla has been trying to minimize spending and maximize revenue, cutting jobs and restructuring while trying to fast-track vehicle deliveries of its new Model 3 to customers, to meet a promise Musk first made in May to be cash-flow positive and profitable in the third and fourth quarters.

The results will cap a turbulent quarter in which U.S. security regulators accused Musk of fraud for misleading tweets and forced him to forgo the chairman role in a settlement.

Bears who bet against the company celebrated, until noted short-seller Citron Research on Tuesday reversed course, saying it believed the Model 3 was a “proven hit.”

“While the media has been focused on Elon Musk’s eccentric, outlandish and at times offensive behavior, it has failed to notice the legitimate disruption of the auto industry that is currently being dominated by Tesla,” Citron wrote.

The Palo Alto, California-based car maker’s shares, which have fallen 15 percent in the past 12 months, were up 0.5 percent on Wednesday.

Tesla scheduled its earnings release earlier in the calendar than usual, most likely because it is expecting to report a profit, Mainstay Capital Management strategist David Kudla said.

The chief question for investors will be whether Tesla is profitably building the new Model 3, which would mean that its earnings would rise as volume improves. Model 3 margins first turned “slightly positive” in the second quarter, Tesla said, after months of manufacturing problems.

Tesla delivered 55,840 Model 3s in the third quarter, worth more than $3 billion in revenue at $59,000 per car - the average price paid without add-ons. That is a substantial increase from $1 billion in the second quarter.

More sales of the higher-priced versions of the Model 3, which carry fatter margins, will help profitability. The all-wheel drive and performance versions help get Tesla closer to its goal of third-quarter Model 3 margins of 15 percent, with 20 percent margins expected for the fourth.

For a graphic on Tesla's balance sheet and strategy, click tmsnrt.rs/2PPLXM5


Musk also could face questions later on Wednesday about whether the company will introduce its long-promised $35,000 Model 3, which Bernstein analyst Toni Sacconaghi said was a double-edged sword: if Tesla does not, some customers will be angry, and if it does, margins likely will be further pressured.

Investors are likely to look hard for one-off boosters to the bottom line.

Tesla gets “zero emission vehicle” credits for its electric cars and can sell them to other manufacturers that have to meet California regulatory goals. It may have been stockpiling them, since it has posted only a gain of $50 million in such credits this year, versus the $360 million it booked in 2017.

Such credit sales pushed Tesla to a profit in its third-quarter of 2016, one of two times it has been in the black so far.

If Tesla cuts capital expenditures, research and development on upcoming vehicles or new hiring, investors will ask whether that reflects improving efficiency or delay of necessary spending.

Musk also has promised to be cash flow positive, and investors will watch whether its rocky delivery system is improving. Shortening the time cars are in transit so that revenue can hit the books more quickly would shorten its cash conversion cycle, boosting cash flow.

The outspoken CEO also is sure to be pressed on his view, repeated since April, that Tesla has no need to raise new capital. Some analysts have questioned that position, given the funding needs for the many projects on Tesla’s radar, which include a Model Y SUV, a heavy-duty truck and a new factory in China.

The Shanghai Gigafactory, based in eastern China, aims to manufacture Model 3 and Model Y cars, with annual capacity of 250,000 vehicles, according to a filing.

Some analysts have estimated the company will need to raise $2 billion by the end of 2018 to fund operations. Between publicly issued bonds and loans from banks and other entities, Tesla has about $2.2 billion due by November 2019.

Reporting by Alexandria Sage, Editing by Rosalba O'Brien and Bill Rigby

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