Tesla: Party Today; Hang the Details
CEO Elon Musk Gets A Huge Break Via A Modest-Sized Settlement With The Sec, Then Thumbs His Nose At The Sec
As I projected, Tesla Motors (TSLA US) stock & bonds rallied this morning on news that CEO ElonMusk and the company settled charges of securities fraud with the SEC on Saturday(see my report Musk Fought the Law and the Law Won—So What?).
Indeed, as I pointed out in my report, they got off easy. Tesla's stock is up 17% as of this writing to $311 and the 5.3% notes have bounced to 87.4 (7.7% ytw)—a 5 month high.
I also warned it remained to be seen if Musk learned anything from the experience that would stick. We didn't have to wait long. The ink was barely dry on the SEC agreement when Musk signaled that third-quarter guidance on profitability was in jeopardy, as I have projected.
And he delivered that little nugget in an email to employees, not in an appropriate format for public disclosure—already thumbing his nose at the SEC.
That troubling oversight was largely ignored, especially after someone conveniently leaked today that Tesla produced a record 80,000 cars in the third quarter, including 53,000 Model 3s. But even this good news comes with hair.
Whoopee!
Investors were clearly relieved that Tesla CEO Elon Musk cooled off enough from his ego-fueled indignation to settle the SEC's lawsuit over securities fraud with a slightly less favorable but still comparatively benign deal.
I also credit the SEC for its uncharacteristically quick resolution of the charges, which removes a troubling and costly overhang causing substantial concern for investors (especially considering the company may need to refinance near-term debt it can't afford to repay, for example).
Under terms of the deal, subject to court approval:
Musk keeps his job as CEO, but has to step down as Chairman for 3 years (versus the previous offer of just 2 years)
Musk and Tesla each will pay a $20 million penalty
Tesla is compelled to add two new independent directors and
Tesla's board will create a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications.
Good luck with that last part.
With the ink barely dry on his agreement with the SEC, Musk emailed to employees on Saturday:
We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday). If we go all out tomorrow, we will achieve an epic victory beyond all expectations.
Go Tesla!!!
Here's the thing. "Very close" to profitability means not profitable the day before the quarter closes, signaling Tesla has a "very" good chance of missing guidance as I have projected (see my forecast in What Tesla Can Learn From Navistar About Arrogant Management, Serious Mistakes, and Survival).
To meet guidance, Musk said employees "must execute really well" and "go all out" on the last day of the quarter. Of course, if numbers actually are below- to barely break-even, this hardly describes an "epic victory beyond all expectations."
Pep talk aside, missing guidance to investors is the kind of material information Tesla should publicly disclose. Yet that didn't happen until today, two days later, when the company quietly reported Musk's email in an 8-K, a filing which still doesn't appear on Tesla's website.
Indeed, Tesla hasn't reported any material events in an SEC filing since September 7th when it reported the latest in a string of exiting finance execs with the September 4th departure of Chief Accounting Officer Dave Morton (see my report Tesla: Dave’s Not Here and Musk Won’t Leave. Tesla didn't report the SEC's lawsuit filed Thursday against Musk and Tesla which accused him of securities fraud and threatened to bar him from serving as an officer or director of a public company, news which routed the stock and bonds on Friday, much less the generous settlement on Saturday driving today's rally.
It's a Bad Idea to Insult the SEC Immediately After Getting a Break From the SEC
Musk's arrogance, dismissive attitude, and persistent disregard for his fiduciary duties as CEO keep getting him in trouble, wreaking havoc on Tesla and its stakeholders. Tesla's board continues to do nothing about it.
This doesn't inspire confidence that Musk or the Board will make convincing efforts to comply even with the SEC's remedies; I suggested in my previous report, linked here, more comprehensive action as necessary to address Tesla's serious management deficiencies.
Ignoring definitive action to address Tesla's egregious lack of management control, oversight, and compliance will drive up already escalating costs to defend and resolve probable settlements and penalties for Musk and Tesla—and its stakeholders—arising from numerous shareholder lawsuits already and yet to be filed plus serious government investigations still underway:
The Department of Justice has launched a criminal probe investigating potential securities fraud by Musk related to his statements and actions with his take-private debacle, similar to the charges just settled with the SEC.
The SEC is investigating whether Musk made false statements related to problems with Model 3 production in 2017 when Tesla raised billions in cash selling stock and bonds. As it turned out, Tesla produced only 2,700 Model 3s versus his projected production guidance which ranged from 200,000 (made in mid-2016) to 20,000 (made in mid-2017).
Lost in all the excitement on Friday was the filing of an amended whistleblower lawsuit, Wochos v. Tesla, which bolsters serious questions raised about Model 3 production in 2017 by The Wall Street Journal and the SEC investigation with statements from now 12 different former Tesla employees.
But Look! Shiny Object!
"Someone" leaked to Electrek the great news today, conveniently a day before expected reports, that Tesla produced more than 80,000 cars in the third quarter.
If so, that's a record for Tesla, though at levels still far below targets Musk projected of 7,000 per week by now which implied more 90,000 to be produced for the quarter. And considering reports that 53,000 Model 3s were produced, roughly mid-point of guidance, this suggests fewer than expected Model Ss and Model Xs may have been produced.
If so, that makes sense. As I have noted before, demand for these aging models appears to be fading. I had projected that sales of higher priced/more profitable Model S and Model X cars could be weaker than expected, resulting in lower than expected consolidated revenue, profit, and free cash flow for the quarter versus Musk's guidance and market estimates.
I've become increasingly concerned about reports which began to surface in mid-August that Tesla suddenly was able to deliver cars to buyers with surprising speed; e.g. just days or even hours after ordered. Then starting in September there were special sales events offering immediate deliveries of Model 3s on a first-come, first-serve basis to any buyer.
Tesla maintains it can't make cars fast enough to meet surging demand, with hundreds of buyers still waiting for months for Model 3s, so how did it have enough cars suddenly available for short-time to immediate deliveries?
Has there been a spike in cancellations, triggering a rush to resell cars?
Has there been a shift in demand for Model 3; e.g. due to loss of subsidies; pending competition; China issues?
Is there truth to troubling stories that Tesla has delivered cars to buyers that actually had been sold already, with VINs assigned, to other buyers? And if so, how is this revenue handled to avoid double-booking which could potentially overstate revenue?
So while the confetti may fly this week about record production numbers, whatever record is being celebrated, it's a good idea to make sure all those cars Tesla finally was able to produce actually have as many buyers as advertised.
Musk's melodramatic exclamations have evolved over the quarter from Tesla's self-styled "production hell" to "delivery hell," saying the company was forced by severe shortages of trailers to make its own car carriers for deliveries (which trucking industry experts immediately disputed) and was begging volunteers and even loyal owners to help deliver new cars at the last minute.
Could be, but there's also a good chance he's setting up excuses, again, for lower than expected sales and/or consolidated profit—perhaps due to "force majeure" as he tossed out defensively in the second quarter earnings call.
In any case, persistent 11th-hour gymnastics necessary to meet targets for yet another quarter do not transmit sustainability or efficiency or even levels approaching stable—much less responsible or capable management.
So I remain wary that Tesla will fall short of management's guidance and market estimates for third-quarter results.
Maintain “Underperform” on TSLA 5.3% Senior Notes due 2025, up three points since Friday to 87.4 (7.7% ytw; 462 bps). Given Tesla's persistently volatile situation we still could see 3-5 points additional downside from here.
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