It turns out that money stoves should not burn the house. They may just keep you warm. So it was with
which reported earnings last week.
Back in June
(ticker: TSLA) CEO Elon Musk called his company’s new manufacturing facilities in Austin, Texas and Berlin, Germany, “money ovens.” This raised fears that cash losses in the second quarter would be much larger than expected. Things didn’t turn out as bad as feared, and stocks surged after the earnings report.
Musk’s words were widely discussed in the last quarter. From his comment until July 20, when Tesla released its second-quarter results, Tesla’s stock has lagged behind expectations.
by 2 percentage points. Tesla stock was about 5 percentage points better than the Nasdaq in a month, according to Musk’s comments.
What’s more, Tesla’s second-quarter earnings-per-share estimate fell from about $2 to $1.80 per share after “money ovens.” New Street Research analyst Pierre Ferragu warned that investors should expect break-even free cash flow this quarter, compared to the $2.2 billion generated in the first quarter of 2022.
After all, Tesla reported second-quarter adjusted earnings per share of $2.27 and generated free cash flow of $621 million. Shares jumped nearly 10% after the earnings announcement. They rose 1.4% in premarket trading on Monday.
This reaction can be obtained when “analysts jump over each other to cut [estimates]”, He speaks
Active Fund of the Future ETF
(FFND) Gary Black reflects on the impact of Musk’s comments.
Black predicts that Tesla will bring in $20 billion in 2023 and more than $170 billion in the next five years. He is more optimistic than Street. Analysts are forecasting about $15 billion in free cash flow of $102 billion over the next five years.
Black’s forecast for 2023 won’t be unprecedented in the auto business, but the five-year forecast is likely to be a record.
(TM) made nearly $27 billion around 2014. But the best five-year stretch was about $105 billion in the mid-2000s. Toyota is, of course, much larger than Tesla in terms of the number of units produced.
Maybe beating Toyota is what Tesla needs to earn a debt hike.
and S&P rates Toyota’s debt at A1 and A+, respectively, making them investment grade. Moody’s rates Tesla’s long-term debt at Ba1 and S&P at BB+. This is the level of junk bonds, which means that both companies consider Tesla’s debt to be speculative.
The ratings vary despite Tesla’s credit metrics appearing to be better than Toyota’s in at least some ways, according to Alexandra Merz, founder of L&F Investor Services, who advises international investors on setting up or buying businesses in USA. Merz spent years as a loan officer at Moody’s in France.
Merz compares cash to debt, debt to equity, and debt to operating income, among other things. “It’s ridiculous,” Merz adds of the rating-metric paradox. “Tesla is clearly in the top three [large cap companies.]”
S&P and Moody’s may not have taken action yet because they usually do so slowly, adds Merz. She doesn’t think Tesla’s low rating is due to the auto industry being cyclical, pointing out that there are quite a few automakers with investment-grade ratings, including Toyota.
(005380.Korea) among others. S&P and Moody’s did not respond to requests for comment on their ratings.
Perhaps not far off is a debt rating upgrade. However, this may not be the catalyst investors are looking for because the ratings don’t really affect the cost of doing business for Tesla. The company does not have large debts.
Elon Musk raised the issue of ratings in May tweet. “Tesla doesn’t need debt, so [ratings don’t] influence us, but this is stupid,” he wrote.
Almost as stupid as calling Tesla a money stove.
Email Al Root at email@example.com
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