Apr 4, 2019, 10:09am EDT | 3,890 views

Tesla's Huge Sales Miss Exposes

Its Negative Cash Flow
Jim Collins Former Contributor
Markets

As Tesla's stock plummets in Thursday morning trading, the key takeaway

from the company's late-Wednesday release of 1Q2019 production and
deliveries figures becomes clear: Tesla is bleeding cash. Now the question
the market is parsing is: was the first quarter just a fluke as demand for
the Model 3 in the U.S. hit the much-hyped “air pocket” after a pull-ahead
of sales into the fourth quarter or is this company back to its historical
cash-burning ways?

The bond market is responding "yes" to the latter half of that question as
Tesla's benchmark 5.3% August 2025 senior notes were last quoted this
morning below 86 cents on the dollar--and yielding 8.3%--after finishing
yesterday’s trade at $87.74. A more accurate portrayal of the "oh, damn"
reaction to Tesla's sales numbers, however, may be found in the pricing of
its credit default swaps (CDS.) According to Reuters, Tesla's CDS pricing
reached 22 cents on the dollar in morning trading, an extremely elevated
level for a company with an equity market capitalization of $45 billion.
A Tesla Inc. Model 3 electric automobile stands charging at dusk at a Tesla Supercharger station
in... [+] © 2019 BLOOMBERG FINANCE LP

This market reaction jibes with the analyst community's reaction to the
weak delivery numbers. Bernstein analyst Toni Sacconaghi is now
estimating negative cash flow for Tesla of $1.1 billion in the first quarter,
but, even more importantly, negative free cash flow of $200 million in
both the second and third quarters before Tesla re-attains cash flow
breakeven in the fourth quarter.

That cash burn profiles Tesla as a company that will have trouble paying
its bills, and that is why the bond market's reaction is much more
important that the stock market’s, even though Tesla's stock price decline
this morning has removed more than $4 billion from its market
capitalization. With another $566 million of convertible debt coming due
in November--it is old SolarCity paper so carries the fantastical
conversion price of $759.36 per Tesla share--the bond market is going to
be the key determinant of Tesla's financial health.

This is how it should be, and is certainly more useful to one who actually
analyzes the company than watching talking heads on CNBC bloviate
about Elon Musk and his legal issues--he is due in court today in
Manhattan. Keep your eyes on the prize, and remember my favorite
investing phrase--cash flow never lies. Tesla's in trouble now, and though
Tesla shares are trading today well below their level of September 2014, in
a credit-crunch situation it is not just the excess that gets removed from
an equity’s valuation, it is the entire valuation itself.

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Jim Collins

I have researched stocks for 27 years, starting fresh out of college at Lehman
Brothers and then moving to Donaldson, Lufkin and Jenrette. At DLJ I was a Senior
Analyst… Read More

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