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Tesla - record production in second quarter

Nicholas Hyett | 3 July 2019 | A A A
Tesla - record production in second quarter

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Tesla achieved record production and deliveries in the second quarter, reaching 87,048 and 95,200 respectively. Increased production enabled cost efficiencies and improvements in working capital.

Orders generated during the quarter exceeded deliveries, and as a result the group is going into the third quarter with a larger order book.

The shares rose 7.1% in aftermarket trading.

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Our view

Elon Musk's Tesla has a fantastic brand and, by all accounts, a fantastic product as well.

Its early push into high performance, high quality electric cars has upended the rules in the automotive industry, where traditionally scale is what counts. In turn, that's given the group a market value of $39.7bn, only slightly lower less than Ford, despite producing around 17 times fewer cars last year.

That starts to look daunting when you consider that Tesla has yet to deliver sustainable profits. A couple of quarters in the black at the end of 2018 gave way to a pretty ugly start to 2019 and the group raised another $2bn from investors to keep things ticking over earlier this year.

However, operating performance is looking increasingly positive. The ramp up in production of Tesla's 'affordable' Model 3 has resulted in record production in the second quarter. Worries that demand could flag when a US subsidy for electric vehicles was scrapped last year seem to have been unfounded.

Importantly the most recent set of production numbers show demand for Tesla's premium Model S/X hasn't been undercut by the introduction of the Model 3. That's good news for margins, which should also be boosted by increased efficiency stemming from higher volumes, although we'll have to wait and see whether that's been enough to offset the headwind from recent price cuts.

Having settled his most recent spat with regulators, Tesla's founder, Elon Musk, has been directing investor attention at the next big technology initiative in the pipeline - autonomous vehicles, and ultimately a fleet of robo-taxis. Tesla's got hugely ambitious targets for its new technologies, with talk of a 1 million-strong taxi fleet as early as 2020. But at the moment we suggest investors remain focused on the more tangible automotive business.

With the shares down from $310 at the start of the year, the valuation, while still high, is certainly better. Throw in an operating plan that seems to be delivering results and it's tempting to turn positive on Tesla. However, given the up and down nature of recent quarters we remain cautious for now.

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First Quarter Results - 25 April 2019

Tesla reported a net loss of $702m in the first quarter, versus the slight profit it had hoped for at the end of last year. The worse than expected result was driven by lower vehicle volumes and reduced margins.

The company expects to report further losses in the second quarter, albeit more modest, before returning to profit in the third.

The shares rose 1.1% in after-market trading.

Tesla posted first quarter revenues of $4.5bn, 37% lower than the previous quarter, as sales of premium Model S and X vehicles declined and Model 3 production increased only marginally.

Changing mix and lower prices mean average automotive margins fell from 24.3% last quarter to 20.2% this quarter - although improving volumes next quarter is expected to see Model S and X margins recover. The company continues to target a 25% margin.

Guidance for total deliveries in 2019 remains unchanged, and production could reach 500,000 if the Shanghai Gigafactory develops as hoped. Total capital expenditure in the year is expected to be between $2bn and $2.5bn.

The company finished the quarter with cash of $2.2bn - down $1.5bn on the end of 2018 - largely because of a $920m bond repayment and increases to the number of vehicles in transit. Free cash is expected to turn positive again in the second quarter.

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