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Tesla - factories close as coronavirus hit

Nicholas Hyett, Equity Analyst | 26 March 2020 | A A A
Tesla - factories close as coronavirus hit

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Tesla Inc USD0.001

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Tesla has shut production at its Fremont and New York plants, with only operations supporting vehicle and energy servicing and charging infrastructure continuing.

The group is implementing 'touchless deliveries' in some locations - allowing customers to pick up cars from designated sites.

The group had $6.3bn of cash at the end of 2019, and raised a further $2.3bn through the sale of new shares in February.

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Our View

Tesla had a massive 2019.

Fourth quarter vehicle production rose 21% year-on-year, the group delivered successive quarters of profit, and free cash was well into positive territory.

The positive free cash flow was particularly impressive given the capital investment that's been going on. Tesla has built an entirely new factory in Shanghai in just 10 months, and production of the Model Y crossover is underway ahead of schedule.

Unfortunately the group hasn't had time to consolidate that progress, and the coronavirus update is now causing significant disruption at precisely the wrong time. Production has been suspended and while 'touchless deliveries' should help already built Tesla's make it to customers, the group can ill afford an extended period without cash coming through the door.

While shutting up factories will help to reduce on-going costs, we're not clear how much of the group's $1.9bn ish a month cash cost base can be put off through the shutdown. The group has the financial headroom to weather the storm for a while, but it's hardly awash with cash and already has a sizeable debt pile.

Longer term we also worry about what an economic downturn could mean for Tesla demand. Even the 'affordable' Model 3 remains a relatively premium product and while Tesla may have caught incumbents napping, the industry is pouring billions into catching up (VW has been looking to spend $60bn on electric cars over 5 years). If the coronavirus sparks a global recession selling premium sedans is not a great business to be in.

That's particularly problematic because Tesla's current proposition is all built on achieving scale and boosting profitability through operating leverage (essentially putting more sales through the same infrastructure).

That might explain why Tesla is moving rapidly to expand the range - with the Model Y already in production, the Tesla-Semi due to start production this year and the Cybertruck waiting in the wings. Despite a fantastic brand, formidable manufacturing capabilities and fabulous product, the group needs to rapidly expand its customer base if it's to deliver the volume and margin growth its valuation implies.

That is no small ask, especially in the current environment. At its current valuation investors need to ask themselves whether it might be a step too far, even for Mr Musk.

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Full Year Results - 30/01/20

Tesla's fourth quarter revenues came in comfortably ahead of market expectations at $7.4bn, up 2% year-on-year. However, net income of $105m in the fourth quarter means the group finished the year with a net loss of $775m.

The group delivered quarterly free cash flow of $1bn, again well ahead of expectations, despite increased investment in the Shanghai Gigafactory and Model Y production.

Tesla produced 104,891 vehicles in the final quarter of 2019, up 21% year-on-year. However, lower prices and increased sales of the lower margin Model 3 meant automotive revenues rose just 1%, while automotive gross profits actually fell 7% to $1.4bn.

Quarterly operating expenses were broadly flat year-on-year, however capital expenditure increased (from $325m this time last year to $412m) as the group ramped up production at the Shanghai Gigafactory and began production of the Model Y in the US.

Tesla has begun work on the next stage of the Shanghai Gigafactory, which will allow production of the Model Y in China and expects to make the first deliveries from its Berlin-Brandenburg factory by 2021.

Net debt at the year-end of $7.2bn fell 13.7% year-on-year.

Tesla expects to deliver 500,000 vehicles next year, with improvements in the solar and storage business too. The group expects to remain profitable and cash flow positive going forwards (with possible exceptions around product launches).

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