Almost Here; Barron's Weighs in on "Frenzied Pops" in Tesla vs Wary Skeptics Like...
Barron's notes "frenzied" deals this week like Tesla, DoorDash, and AirBnB seem like 1999 exuberance all over again, but there also are "skilled" skeptics like me who really irritate Elon Musk.
I am spending most of this week getting the final work done so I can fully launch Bond Angle here on Substack with all my research available to you at once. It now looks like we could be days away from going live and I couldn’t be more excited!
Meanwhile, I wrote about Tesla on Tuesday in a report called “Tesla to Sell Another $5 Billion in Stock—Might As Well” (all Bond Angle Substack links here will work as soon as I flip the switch to light up all my reports).
Some People Are Never Satisfied
Tesla CEO Elon Musk should be having a great week. But then the stock dropped on news the company plans to raise another $5 billion from selling stock. Then he complained to the Wall Street Journal that there were too many MBA-types paying too much attention to financial performance of companies and not enough on producing quality products.
Which is very interesting because this seems to me to be exactly what Tesla does, not that it seemed to deter investors one bit from gobbling up its $5 billion secondary offering.
Barron's noticed it too, and how much Tesla, DoorDash Inc (DASH US), and Airbnb Inc (ABNB) and other similarly inflated deals out this week felt like 1999—and not in a good way.
Tesla is selling another $5 billion in stock—$12 billion now for the year—because it can and, surprisingly, it probably still needs the cash. That’s just one of many reasons investors shouldn’t buy.
Elon Musk gets irritated with those of us who call out problems with Tesla’s dicey financials and prospects, telling the The Wall Street Journal that the focus seems to be weighted too much on “board meetings” and “spreadsheets” and not enough on whether the product is “as awesome as it could be.” To which he adds, “probably not.”
That’s certainly true for Tesla. Its cars still trail all of its peers in quality and reliability rankings by JD Powers and Consumer Reports. The thing is we do care that such nagging problems have plagued Tesla’s cars and their owners for years, topped off with its poor customer service to boot. About what one might expect from a company that eliminated its entire quality control department in January last year in a scramble to slash costs (see my report “Tesla's Plan B 2.0; Y Not” on 3/10/19).
Too cute by half for Musk to smugly suggest that other companies and market observers should pay more attention to companies making products as awesome as they could be and not worry so much about the numbers.
It’s also galling every time Musk so blithely dismisses one of the biggest and longest running concerns about Tesla: its problematic financial reporting. But of course, he does it because he can. Investors have clearly shrugged off pesky details like whether Tesla actually makes money, much less whether what Tesla reports is remotely close to its underlying core operating performance. The magic will just “happen” somehow.
This has become even more complicated given Tesla’s increasing struggle to sustain same-store demand in all its markets, problems it has masked with market expansions into Europe and China and by launching the flawed Model Y which, as I expected, quickly overtook the stalling flagship Model 3 (see my latest on this in “What’s Going On With Tesla’s Demand?” on 10/27/20).
Nevertheless, Tesla is now worth around $600 billion, more than all other major automakers combined, even though, as I’ve detailed for years, none of its businesses have ever generated unvarnished profits.
Investors may not care, but they should. Because soon even an indirect interest in the S&P 500 Index will be impacted by Tesla’s fortunes and follies when it comes in as the sixth largest member, settling between Facebook Inc A (FB US) and Berkshire Hathaway Inc Cl A (BRK/AUS).
Barron’s Randall Forsyth agrees, calling out Tesla in his story today as just one of the “frenzied pops in the highly anticipated initial public offerings of the past week.”
Forsyth called it “ironic” when Musk “decried the ‘M.B.A.-ization of America’ to The Wall Street Journal this past week for U.S. corporations supposedly focusing too much on financials”… “given Tesla’s adept financial engineering, including its announcement this past week of a $5 billion sale of stock, its third equity financing this year, for a total $12 billion.”
He then refers to my recent report:
Musk’s criticism seems directed at those skilled at analyzing the EV maker’s income statement and balance sheet, such as Vicki Bryan, who pens the Bond Angle research letter” (I’ve updated the link here from bondangle.com as cited in his story).
“Tesla’s addition to the S&P 500 followed its reporting of a requisite four consecutive profitable quarters, which can be “traced entirely to energy credit sales plus noncash accounting and unusual items—none of which are its core business,” she writes.
These items provided a $1.6 billion boost to reported free cash flow of $1.93 billion in the four quarters through Sept. 30, which, however, ignored $100 million for solar-equipment capital expenditures and $1.1 billion in capex funded by leases. Taking all that into consideration, operations actually consumed more than $800 million in cash, she concludes.
The entire $9.18 billion year-over-year increase in reported cash, to $14.53 billion on Sept. 30, resulted from net borrowing of $1.5 billion and the sale of $7.7 billion in stock and equity equivalents, Bryan adds. The ebullient stock market, augmented by the index effect, provides the cheap capital to keep the Musk magic going.
Ebullient market indeed. It probably took me longer to write my report than it took for Tesla to sell out another $5 billion in stock, with frantic money probably waiting in the wings to buy more.
But I cover Tesla bonds, not the stock, and they tell a different story as bond markets tend to do. In the past three months, Tesla stock has spiked 85% to $610 as of today on enthusiasm over the company’s four consecutive quarterly “profits” and the prospect of it joining the S&P 500. By comparison, Tesla bonds have remained little changed at roughly 104 on the same major news and even after additional positive nudges when S&P recently increased its credit quality rating a notch to “BB-” and put it on “positive outlook.”
This is partly due to spreads tightening with falling treasury yields, but Tesla bonds have persistently limited appeal at a paltry 2.7% yield, especially considering, as I recently highlighted again, that nearly 2/3 of reported EBITDA comes from unusual/nonoperating/noncash items and accounting boosts. Pricing also indicates a meager 76 bps per turn of leverage on my estimated 2020 reported EBITDA and an appallingly low 46 bps per turn of leverage on core operating—unvarnished—EBITDA. The 229 bps spread is tighter by 185 bps versus the BoA High Yield general index, and its notable that this gap remained essentially unchanged versus three months ago even after Tesla “improved” to now a B3/BB- issuer (see my report “Things People Believe: Flat Earth, Faked Moon Landings, and Tesla $2100” on 8/23/20).
So, yes, Tesla bonds remain a bad value, but Tesla stock is trading at P/E ratio of 966, and counting. That’s a whole different kind of crazy.
Stay tuned.
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