Tesla Bonds Go Boom
Tesla Bonds Go Boom
Tesla's First Quarter Is Shaping Up To Be Disaster And CEO Elon Musk Picks Another Fight With The SEC
Remember last week when Tesla Motors (TSLA US) was set to dazzle the world with the eagerly awaited unveiling of the long-promised Model Y, on Pi Day! (see my report Tesla: Now We Know the Y But Not the How). Good times.
Then, this happened:
Model Y turned out to look and act just like Model 3, but with unconvincing features (third-row seat? Seriously?) and a much later than expected delivery target in 2020-2021 when, I warned, it could be so outdated it's competitively irrelevant.
CEO Elon Musk escalated his fight in the federal court considering the charge of contempt against him lodged by the SEC with a palpably arrogant defense. The SEC said Musk's “brazen disregard of this court’s order is unacceptable and unworkable going forward.”
Tesla made dubious claims about orders and deliveries that seems to be more alarming than inspiring to investors already spooked by the company's calamitous strategy blunders which seem to be increasingly fueled by severe liquidity pressure (see Tesla's Plan B 2.0; Y Not and Tesla: Now We Know the Y But Not the How).
Which means Tesla stock and bonds closed this week near six-month lows, with the spread on the benchmark 5.3% notes trading at a record 600 bps on Friday as they slumped back to 85.
TGIF
It's hard to say which nugget set Tesla stock and bonds tumbling this morning, but it's clearly not what the company was hoping following the Business Insider story of yet another conveniently "leaked" email reportedly from Musk to all employees pleading "Vehicle Delivery Help Needed!" and "car deliveries should be everyone's top priority until the end of the quarter on March 31."
"What has made this particularly difficult is that Europe and China are simultaneously experiencing the same massive increase in delivery volume that North America experienced last year," Musk said in the email. "In some locations, the delivery rate is over 600% higher than its previous peak!"... the "biggest wave in Tesla's history" and "won't be repeated in subsequent quarters."
Elon Musk, per email to employees as reported by Business Insider.
No, this obviously material news probably won't be reported in an 8-k filing any time soon, but this leak conveniently followed Tesla's notice on Wednesday (via tweet, of course) that:
Due to unusually high volume, Tesla was unable to process all orders by midnight on Monday, so the slight price rise on vehicles is postponed to midnight Wednesday.
@Tesla; 9:10 AM - 19 Mar 2019
This followed another and even more specific leaked email last week from Tesla Vice President Sanjay Shah, as Business Insider reported, "We need your help to make more progress in volunteer sign-ups" and "We have to deliver 30,000 more cars in next 15 days."
So Tesla apparently was so overwhelmed with orders this week its website couldn't handle the load. And it expected to deliver an incredible 30,000 cars in the last 15 days of the quarter, according to—off all people—the guy Tesla hired last fall to help grow market share...for its foundering solar energy products.
And then from Musk it somehow slipped out the Tesla is having its biggest delivery wave in history!
How "lucky" for us this just "leaked" out—twice—near the end of the last month of what has been an otherwise disastrous quarter.
Great news! Now prove it.
Recall that Tesla's US sales have fallen into alarming decline so far this year, following disappointing December monthly sales as I expected (see Tesla: Down to the Wire).
Clearly sales were pulled forward, as expected, ahead of the pending reduction as of January 31st in tax credits for buyers of Tesla's cars. But there also have been indications since the third quarter last year that Model 3 demand already seems to be moderating just as sales of aging Models S and X have been tumbling.
Some of this can be attributed to increasing competition from comparably exciting rivals, not surprising given it took more than two years before the Model 3 was finally delivered and ramped up. Indeed, the long overdue $35k base version of Model 3 was just launched a few weeks ago—a three-year wait—and still won't be delivered for another 6-8 weeks.
However, I also have suggested since last summer that buyers are being spooked by Model 3's troubling quality and reliability problems, Tesla's poor and worsening customer service, and even whether the company will be around to honor their warranties(see Tesla's Plan B 2.0; Y Not and Musk and Weird Q3 Developments Are Driving Investors to Telsa's Rivals" and "Tesla: Dave’s Not Here and Musk Won’t Leave" and "Tesla: Down to the Wire" and Tesla: Looking for Trouble).
Tesla's chronic unprofitability and it's looming cash crunch seem to have fueled unproductive, counterproductive, and even strikingly ill-conceived responses such as several rounds of severe layoffs of seasoned staff, slashing reserves for warranty repairs, starving R&D and capex ahead of ominously late pipeline development and expensive plant and network expansions underway, and abruptly abandoning its foundational business platform in favor of immediate online-only sales.
This week we learned Tesla just eliminated its annual service and maintenance program in favor of ad-hoc, as-needed measures.
This has produced obvious chaos potential buyers and customers may find hard to overlook, even with inducements from several rounds of aggressive price cuts Tesla can ill-afford. Total US deliveries fell another 8% in February to 7,650 versus the 74% plunge in January to 8,325 compared with December's record deliveries of 32,600.
Model 3 deliveries actually logged an even worse February decline of 12% to 5,750 versus 6,500 in January and were down 77% versus December deliveries fo 25,200.
Against such trends, delivering 30,000 cars in just two weeks to close out this otherwise disastrous quarter seems incredible—that would be more than 65% of total deliveries for the quarter. This implies nearly a 300% jump in March versus February—a remarkable rebound, as shown in the chart above, versus any sequential change for total deliveries for any of the previous fourteen months. Indeed, my estimates for March, which are much lower versus street projections, indicate Tesla may be challenged to deliver 30,000 cars in the US for the full quarter.
We’ll know soon enough
Reports of Tesla's global deliveries for February are expected at the end of March, just over a week from now. A week later will follow InsideEVs' report of Tesla's US deliveries for March.
While we wonder in the meantime about the reliability of Tesla's "leaked" news, consider this:
Musk has pointedly ignored the terms of his settlement with the SEC for securities fraud with his repeatedly reckless and damaging speech and public behavior as CEO of Tesla. He brazenly bragged about this to CBS 60 Minutes and that he does "not respect the SEC."
Remember also that Musk balked back in October even at accepting what I thought was a fairly benign settlement offered by the SEC. Why? He insisted on being able to tell the world he actually did nothing wrong, even though he had been caught red-handed lying about his bogus plan to take Tesla private with "funding secured" that didn't exist (see Tesla’s Take-Private Plan: Never Mind).
This week he made the ludicrous complaint to the court through his lawyers that the SEC settlement actually violated his right to free speech by requiring his communications to be pre-screened before public dissemination. Never mind that his reckless behavior has evaporated billions in Tesla's market cap, impaired the company's ability to raise capital, triggered perhaps a billion dollars or more in legal liabilities and expenses to defend and settle dozens of lawsuits and continuing government probes, and shredded the company's credibility with all its stakeholders.
Musk remains cavalier about even his obvious misstatements. He "believed" and "assumed" without sound evidence or considered planning and consultation with all material parties, including Tesla's board, that his take-private idea would work out.
His wildly inaccurate statements about production and delivery targets, which have triggered ongoing criminal investigations by the SEC and the Department of Justice, were examples of "pride and optimism, not of guidance.” Except, of course, any projections by the CEO about the company's performance actually is guidance for which management should be held accountable.
Some investors worry about the severity of the punishment the court might impose for Musk's latest stunt via tweet, including his removal as an officer and director of Tesla.
The trouble is, Musk has become Tesla's most dangerous risk. I'm more concerned about the greater likelihood that Musk just gets another slap on the wrist; e.g. a modest fine and similarly toothless remedy that requires, again, that Tesla's feckless board keep him in check. This will affirm to Musk that he is untouchable, no matter how reckless and disingenuous and unreliable he is.
Fast forward to this week when Tesla claims it received a flood of orders that overwhelmed its website. It expected an overwhelming record "wave" of 30,000 deliveries the last 15 days of the quarter." This sounds even more severe than Tesla's "delivery hell" Musk identified at the end of the busy third quarter when he said Tesla had to buy its own auto haulers to handle the rush. That company turned out to be Central Valley Auto Transport which Tesla bought for $13.8 million in stock.
Yet now with just 9 days left in the quarter, here's a picture taken by Machine Planet @Paul91701736of those bright red trucks and trailers yesterday afternoon, still parked and empty at Tesla's Lathrop, California facility:
I remain wary of Tesla's typical eleventh-hour theatrics, and affirm my estimates for consolidated revenue in the first quarter at $4.15-4.47 billion (up 21-31% y/y but down 38-43% sequentially) and $420-470 million in EBITDA (10.2-10.5% margin), producing a net loss near $130-185 million versus $91 million net income in the fourth quarter and the $710 million loss last year.
If so, this indicates potentially $300-400 million consumed in operations before debt payments of at least $920 million to retire the convertible bond due March 1st—which evaporated Tesla's cash cushion. (See full estimates for 2019-2010 and models in Tesla: Now We Know the Y But Not the How).
Maintain “Underperform” on TSLA 5.3% Senior Notes due 2025, last seen down 2 points at 85.5 (8.3% ytw; 603 bps). That’s just 113 bps of spread per turn of estimated leverage in 2019 on potentially increased borrowing to offset cash shortfalls—hardly adequate compensation for such a volatile issuer with such precarious prospects. Given Tesla's persistent uncertainty and escalating risks, we could see 3-5 points additional downside from here.
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