March 23rd, 2019 by Michael Grinshpun
Diving Into Tesla Cash Flow, 2019 Obligations, Liquidity, & A Bit More
• Analysts appear to speak about Tesla’s “cash problem” usually, particularly main as much as the $920 million bond compensation and after the Model Y occasion.
• Tesla has entry to so many sources of liquidity that the “cash problem” is a legendary drawback.
• Moody’s maintains its junk score on Tesla regardless of Tesla’s glorious liquidity and profitable manufacturing targets.
Leading as much as Tesla’s huge $920 million convertible bond compensation, many analysts, media prognosticators, and conspiracy theorists on twitter expressed grave considerations over Tesla’s money balances and liquidity. Analysts working for funding banks known as for Tesla to boost capital. The crazier people floated the potential for chapter, a liquidity disaster, or a large restructuring ensuing ultimately of Tesla’s progress story, all primarily based on the concept Tesla can’t elevate capital for some cause.
But on March 1, Tesla repaid the convertible bond, and there was radio silence from the ever-so-confident analysts, media prognosticators, and conspiracy theorists we simply talked about. That is, till the Model Y unveiling on March 14th.
“This timing likely implies the company is postponing the costly Model Y ramp in 2019 to conserve cash. … We now believe it’s more likely Tesla will raise money in 2019,” wrote analyst Gene Munster, a longtime Tesla bull.
“With this potentially bullish catalyst out of the way, we anticipate a cautious narrative to resume its course until Tesla can put to bed market concerns over near-term demand, cash flow, and liquidity,” wrote Morgan Stanley’s Adam Jonas, a longtime Tesla flip-flopping analyst.
“More expensive customer deposits for Model Y are likely to reinforce bear concerns about Tesla’s cash,” wrote Toni Sacconaghi, a Bernstein analyst.
Costlier buyer deposits for Model Y “suggests Tesla remains in a precarious cash position,” wrote Jeffrey Osborne, an analyst at Cowen & Co.
So, naturally, if an investor who’s diligent and does their very own analysis as a substitute of blindly believing media and analyst narratives have been to dive into the financials, they might discover Tesla is going through money issues, proper?
Wrong. Tesla’s money stability is wholesome, and its entry to liquidity is plentiful, and that should be evident to each investor. Let us make it so.
Diving into the Numbers
So allow us to discover Tesla’s money and sources of liquidity step-by-step and construct an evaluation. First, we begin with Tesla’s present money holdings. Tesla had $three.686 billion in money on the finish of This fall 2018, based on the latest shareholder letter.
Next, we consider Tesla’s present money flows. In Q3 and This fall of 2018, Tesla was operationally money move constructive and free money move constructive, with a median operational money move of $1.313 billion per quarter. In 2019, maybe a few of this money move can be strained with decrease revenues and margins from automobile value cuts and demand shifts, rising operational bills, and growing inventories (together with automobiles in transit). Personally, I view these challenges with skepticism, as Tesla lately said to an analyst that it’s promoting each automobile it might make and Tesla has lately undertaken many cost-cutting strikes, however let’s be conservative for this evaluation and assume that the operational money move can be minimize in half to $656.5 million per quarter or $2.626 billion in all of 2019 attributable to these headwinds.
Next, we transfer to different sources of liquidity. As of This fall 2018, Tesla had $1.54 billion borrowed from its asset-backed credit score settlement (learn: bank card). On March 6, 2019, Tesla expanded the borrowing capability of this credit score settlement to $2.425 billion, leaving $885 million of borrowing capability obtainable to the corporate. Tesla additionally has a warehouse credit score line, which permits the corporate to borrow in opposition to automobile leases. Tesla at the moment has $92 million borrowed from the warehouse line, leaving $1.08 billion in borrowing capability left as Tesla leases extra automobiles. Moreover, on March 1, Tesla secured a $521 million development mortgage from Chinese banks for development of Gigafactory three in China. Finally, one other supply of liquidity for Tesla is delaying provider funds. A measure of how a lot Tesla can delay provider funds is Days Payable Outstanding or DPO, which measures the typical period of time Tesla took to pay its suppliers after they delivered their merchandise. DPO peaked in Q2 2018 at 82 days, and in This fall 2018, DPO was solely 54 days. If Tesla was in a money crunch prefer it was within the first half of 2018 when Model three manufacturing couldn’t appear to select up, it might prolong its days payable excellent. If Tesla prolonged the DPO to 82 days from the present 54, it may maintain onto $1.749 billion in more money. Between all of the money and sources of liquidity, Tesla has $10.547 billion obtainable for 2019.
But what about debt funds and different obligations? Tesla made a $920 million bond fee on March 1 and has one other $566 million bond fee due in November. Tesla additionally plans to spend $2.5 billion in capital expenditures in 2019 to purchase tools, land, development, and so on. That’s it. That is all of Tesla’s obligations that we have to embody. All others, together with accounts payable and such, are implicitly included as bills in operational money flows, which I contemplate above. The whole obligations for 2019 are thus $three.986 billion.
When you place all of it collectively right into a graphic, it’s instantly clear that Tesla has no liquidity drawback in any way. The California firm has $10.547 billion in money and liquidity obtainable for 2019, and solely $three.986 billion in obligations for 2019. Diligent buyers should ignore narratives a few lack of money at Tesla unfold by analysts, media prognosticators, and conspiracy theorists on twitter, particularly if these claims are merely said and never backed up by math as executed right here.
Moody’s, Please Do Your Job
Moody’s is an authority on creditworthiness, and should be extra accountable than analysts, media prognosticators, and conspiracy theorists on twitter. However, it appears that evidently Moody’s has not been held accountable for its present junk score on Tesla’s debt.
In March 2018, Moody’s wrote: “Tesla’s liquidity consists principally of $3.4 billion in cash and securities at December 31, 2017. The company also has moderate availability under the $1.9 billion ABL facility. This liquidity position is not adequate to cover: 1) the approximately $500 million in minimum cash that we estimate Tesla must maintain for normal operations; 2) a 2018 operating cash burn that will approximate $2 billion if Tesla maintains high discretionary capital expenditures to increase capacity; and 3) convertible debt maturities of approximately $1.2 billion through early 2019. These cash needs will likely require Tesla to undertake a near-term capital raise exceeding $2 billion. Moreover, if the company maintains its expected pace of expansion, it will likely need to raise additional capital during the second half of 2019.” Moody’s additionally wrote, “The rating could be raised if production rates of the Model 3 meet Tesla’s current expectations and if the company maintains good liquidity.”
As it seems, Moody’s was useless flawed about Tesla’s money scenario, as Tesla’s money move for the 12 months 2018 was +$311 million as a substitute of −$2 billion as Moody’s projected, and this was inclusive of a $230 million bond compensation. Tesla ended 2018 with $three.686 billion in money, a major increase over the 2017 stability. This money stability represents glorious liquidity, illustrated additional by my evaluation above. As for Tesla’s efficiency on Model three goal manufacturing charges, let’s have a look at Bloomberg’s tracker:
To me, that certain appears to be like like Tesla is hitting manufacturing targets for three quarters straight after falling quick in 2017 and the primary half of 2018. Tesla hit manufacturing targets and maintained glorious, not simply good, liquidity. Naturally, Moody’s upgraded Tesla’s junk B3- score, as they stated they might, proper?
Wrong once more. Instead, Moody’s launched a observe saying “Tesla’s credit profile is strained” regardless of the corporate sustaining good liquidity and hitting manufacturing targets, two factors Moody’s concedes. Instead, Moody’s centered on a qualitative evaluation of the optics of Tesla’s current administration choices, saying, “Tesla is challenged internally by ongoing operational missteps and strategy reversals over a short time period.” Moody’s blamed Tesla’s “ongoing pattern of senior management turnover and weak governance” for its chaotic decision-making course of. Now, this criticism appears honest, since govt turnover and technique reversals are what the media and a few funding financial institution analysts have been protecting. However, there’s grave hazard in counting on these qualitative assessments somewhat than quantitative assessments of creditworthiness. These qualitative assessments are extraordinarily subjective and are liable to exaggeration by the media. For instance, how can one objectively measure chaos of administration choice making course of? How many months should cross after a “chaotic decision” for administration to not be thought-about chaotic? Meanwhile, quantitative analysis of Tesla’s creditworthiness exhibits Tesla has glorious capacity to fulfill present obligations, regardless of the misguided protection of the identical analysts and media who form narratives round Tesla drama, particularly about “running out of cash.”
Moreover, Moody’s didn’t appear to supply steerage as to what components may result in an additional downgrade or improve.
So, to sum up, Moody’s shouldn’t be being accountable by failing to improve Tesla’s debt score after manufacturing charges met Tesla’s targets, not Moody’s expectations, and Tesla maintained good liquidity and constructive money flows within the again half of the 12 months. Furthermore, Moody’s isn’t being very clear by selecting to emphasise subjective qualitative assessments over goal quantitative assessments of creditworthiness. Finally, Moody’s shouldn’t be clear nor accountable if it fails to state publicly what may result in an additional downgrade or improve of Tesla’s debt.
The ethical of this story is that buyers ought to stay diligent by not solely counting on any authority or narrative weavers to type their funding choices. Not analysts, media speaking heads, twitter trolls, and even Moody’s, apparently, must be the supply of your opinion. Instead, buyers ought to have a look at the identical uncooked info that each one these commentators have a look at and type their very own opinions.
Postscript for Elon Musk
With all due respect, Mr. Musk, your current actions feed the fireplace. Even although Tesla shouldn’t be going through a money or liquidity drawback, drastic value cuts and fast choices that change inside per week (retailer closures) have a tendency to fret buyers, analysts, and media. Something must be executed in regards to the seemingly frequent govt departures at Tesla, even when the media is inflating the variety of departures in folks’s thoughts via availability bias and protecting Tesla departures greater than different firms. Moreover, your spats with the SEC harm buyers tremendously and enhance threat, and even when you assume it’s unjust, maybe it’s finest to easily adjust to the SEC’s orders in an extra-strict method. In different phrases, even when the criticisms are unfair, pull the rug out from critics and provides them much less to criticize.