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Tesla - record fourth quarter

Nicholas Hyett | 3 January 2020 | A A A
Tesla - record fourth quarter

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Tesla delivered record production and deliveries during the fourth quarter - with quarter-on-quarter improvements in both premium Model S and X and the newer Model 3. For 2019 as a whole Tesla delivered around 367,500 vehicles.

The focus remains on expanding production in the US and Shanghai. The group has already produced just under 1,000 cars from the Shanghai factory, and achieved a production rate of over 3,000 units per week, excluding battery pack production.

The shares rose 4.4% following the announcement.

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Our view

Tesla's 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 $77.6bn, compared to $37.4bn for Ford, despite producing around 17 times fewer cars last financial year.

Tesla's done a lot of work to close the production gap over the last few months - with total vehicle production up 50% year-on-year. However the company's yet to prove it can be sustainably profitable. 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 $2.4bn from the market to keep things ticking over.

Investors will hope more recent results become the new norm. But we're going to wait for a few repeat performances before we turn more upbeat.

Having said that we think the positive, and not insubstantial free-cash flow, is perhaps more important in the short term. It means Tesla could be self-funding, which would be a big relief for investors, as Tesla's breakneck expansion means big demands on the cash pile. If the group's able to generate enough cash to fund its own growth, rather than relying on the market, it's a big step in the right direction.

The other good news is operating performance is looking better. The ramp up of Tesla's 'affordable' Model 3 has seen total deliveries rise 46.6% year-on-year for the fourth quarter. Worries that demand could flag when a US subsidy for electric vehicles was scrapped last year seem to have been unfounded - although wider economic worries could yet drag on sales of what is still a premium product.

Having settled his most recent spat with regulators, Tesla's founder, Elon Musk, has been directing investor attention at other big technology initiatives in the pipeline - autonomous vehicles and the recently unveiled Cybertruck. However, we suggest investors remain focused on the more tangible automotive manufacturing business for now.

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Third Quarter Results - 24 October 2019

Tesla reported a decline in both revenues and profits in the third quarter, down 8% and 34% respectively. However, profits of $342m were well ahead of market expectations, and the group generated $371m of free cash.

Total revenue was $6.3bn, with the decrease reflecting a rise in leased vehicles - where only a portion of revenue is recognised up front. Revenue was also impacted by a decline in the average selling price of Model 3 cars.

Profit surprised the market by coming in at $342m, reflecting lower costs and stronger margins. Automotive margins improved 3.93 percentage points to 22.8%.

Tesla generated positive free cash flow in the quarter of $371m. As a result, Tesla finished the quarter with cash and cash equivalents of $5.3bn, 8% more than last quarter. The group now expects to be mostly self-funding going forwards, underpinned by positive quarterly cash flows.

The Shanghai Gigafactory is progressing ahead of schedule, and the Model Y is now due to launch next summer.

The group is "highly confident of exceeding 360,000 deliveries this year", which is slightly lower than previous guidance of 360,000 to 400,000.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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