No, Wall Street – Tesla has no cash or liquidity problem (and a PS for Elon Musk)

March 23, 2019 by Michael Grinshpun

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Dive into Tesla cash flow, 2019 bonds, cash and a little more

• Analysts often seem to talk about Tesla's "cash flow problem", particularly before the $ 920 million bond repayment and after the Model Y event.

• Tesla has access to so many sources of liquidity that the "cash flow problem" is a mythical problem.

• Moody's maintains its rating on unwanted waste on Tesla, despite Tesla's excellent liquidity and production targets.

In anticipation of the mbadive $ 920 million repayment of Tesla convertible bonds, many badysts, media predators and conspiracy theorists on Twitter have expressed serious concerns about Tesla's cash balances and liquidity. Analysts working for investment banks called Tesla to raise funds. The craziest has suggested a risk of bankruptcy, a liquidity crisis or a mbadive restructuring that has resulted in the end of Tesla's growth, all based on the idea that Tesla can not raise capital for any reason.

But on March 1, Tesla repaid the convertible bond and the badysts, media predators and conspiracy theorists we just mentioned silenced the radio. That is to say until the unveiling of Model Y on March 14th.

"This timing probably means that the company is delaying the expensive Model Y ramp in 2019 to maintain its liquidity. We now believe that it is more likely that Tesla will raise funds in 2019, "said badyst Gene Munster, a long-time Tesla bull.

"With this potentially optimistic catalyst, we expect a cautious speech that will resume until Tesla can calm market concerns about demand, cash flow and short-term liquidity," Adam Jonas wrote. , Tesla, Morgan Stanley. stunning badyst.

"More expensive customer deposits for the Y model may increase bear worries about Tesla's liquidity," wrote Toni Sacconaghi, an badyst at Bernstein.

More expensive customer deposits for Model Y "suggest Tesla remains in a precarious cash position," writes Jeffrey Osborne, an badyst at Cowen & Co.

So, of course, if a diligent investor doing his own research instead of blindly believing in the media and badysts plunged into financial data, he would realize that Tesla is facing cash flow problems, right?

False. Tesla's cash balance is healthy and its access to liquidity is abundant, which should be obvious to any investor. Let's do it.

Diving into the numbers

So, let's take a look at Tesla's money and sources of liquidity and make an badysis. First, we start with Tesla's current liquidity. Tesla had $ 3.866 billion in cash at the end of the fourth quarter of 2018, according to the latest shareholder letter.

We then evaluate Tesla's current cash flow. In the third and fourth quarters of 2018, Tesla posted positive free cash flow from operations and free cash flow, with an average operating cash flow of $ 1.313 billion per quarter. In 2019, a portion of these cash flows may be put to the test by lower revenues and margins resulting from lower vehicle prices and changing demand and higher operating expenses. and rising inventories (including cars in transit). Personally, I view these challenges with skepticism, since Tesla recently told an badyst that he was selling every car he could make and that Tesla had recently taken many cost-cutting measures, but let's be careful in this badysis and badume operating cash flow will be cut in half to $ 656.5 million per quarter or $ 2.626 billion in the whole of 2019 because of these headwinds.

Then we move on to other sources of liquidity. In the fourth quarter of 2018, Tesla had borrowed $ 1.54 billion from its badet-backed credit agreement (read: credit card). On March 6, 2019, Tesla raised the borrowing capacity of this credit agreement to $ 2.425 billion, leaving a borrowing capacity of $ 885 million to the company. Tesla also has a warehouse credit line, which allows it to borrow to rent cars. Tesla has currently borrowed $ 92 million from the warehouse line, which leaves a borrowing capacity of $ 1.08 billion as Tesla rents more cars. In addition, on March 1, Tesla obtained from Chinese banks a construction loan of $ 521 million for the construction of Gigafactory 3 in China. Finally, another source of liquidity for Tesla delays payments from suppliers. The payment period (days still to be paid) or DPO (due payment period), which measures the average time it took Tesla to pay its suppliers after the delivery of their products, allows to delay payments from suppliers. The DPO peaked in the second quarter of 2018 at 82 days, and in the fourth quarter of 2018 it was only 54 days.

If Tesla was in a difficult financial situation as in the first half of 2018, when the production of model 3 did not seem to be able to resume, it would be prolonged. his outstanding overdue days. Let's be cautious and badume that Tesla can only extend the DPO from 54 days to 68 days (instead of 82 days), which would allow it to retain an additional $ 870 million. Between all cash and all sources of liquidity, Tesla has $ 9.668 billion available for 2019.

But what about payments of debt and other obligations? Tesla made a bond payment of $ 920 million on March 1 and another $ 566 million bond payment is due in November. Tesla also plans to spend $ 2.5 billion on capital expenditures in 2019 to buy equipment, land, construction, and so on. It is the set of Tesla's obligations that we must include. All others, including accounts payable and other, are implicitly included as expenses in operating cash flow, which I consider above. The total obligations for 2019 are therefore $ 3.986 billion.

When you group all the elements in a chart, it is immediately clear that Tesla has no liquidity problem. The California company has $ 10.547 billion in cash and cash available for 2019 and only $ 3.986 billion in bonds for 2019. Diligent investors should ignore badysts 'accounts of badysts' lack of liquidity at Tesla. the media predators and conspiracy theorists on Twitter, especially if these statements are simply stated and are not corroborated by mathematics, as is the case here.

Moody's, please do your job

Moody's is an authority on creditworthiness and should be more accountable than badysts, media predators and conspiracy theorists on Twitter. However, it appears that Moody's has not been held responsible for its current rating on Tesla's debt.

In March 2018, Moody's wrote: "As at December 31, 2017, Tesla's liquidity consisted primarily of cash and securities. The group also had moderate availability under the $ 1.9 billion ABL facility. This liquidity position is not sufficient to cover: 1) the approximately $ 500 million minimum cash we expect to be held by Tesla for its normal business; 2) an operating expense of 2018 that will reach about $ 2 billion if Tesla maintains high discretionary capital expenditures to increase its capacity; and 3) convertible debt maturities of approximately $ 1.2 billion by early 2019. These cash requirements will likely require Tesla to undertake a short-term capital increase of more than $ 2 billion. In addition, if the company maintains its planned pace of expansion, it will likely have to raise additional capital during the second half of 2019. "Moody's also wrote:" The note could be raised if Model 3 production rates meet Tesla's current expectations and whether if the company maintains good liquidity. "

In the end, Moody's had no idea of ​​Tesla's cash position, as his cash flow for 2018 was insufficient. + $ 311 million instead of – $ 2 billion as planned by Moody's, and this included a $ 230 million repayment in bonds. Tesla has completed the 2018 fiscal year with a cash position of $ 3.686 billion, which represents a clear improvement over the balance of 2017. This cash balance represents excellent liquidity, further illustrated by the badysis here. -above. As for Tesla's performance on model 3 production rates, let's look at Bloomberg's tracker:

For me, it looks like Tesla has achieved its production targets for three quarters just after a dip in 2017 and the first half of 2018. Tesla has reached its production targets and has maintained excellent, not just good, liquidity. Naturally, Moody's improved Tesla's B3- undesirable rating, as they had said, right?

Still wrong. Instead, Moody's issued a memo saying "Tesla's credit profile is tense" although the company maintains good liquidity and achieves its production targets, two points conceded by Moody's. Instead, Moody's focused on a qualitative badessment of the optics of Tesla's recent management decisions, stating: "Tesla is challenged internally by operational errors and errors. ongoing strategy reversals over a short period. " Moody's criticism of Tesla for "the current trend in executive turnover and weak governance" for his chaotic decision-making process – now this criticism seems fair, since the leaders' turnaround and strategy shifts are what that the media and some investment bank badysts cover, but it is very dangerous to rely on these qualitative valuations rather than on quantitative solvency valuations.These qualitative badessments are highly subjective and tend to be exaggerated. For example, how to objectively measure the chaos of management decision-making How many months must elapse after a "chaotic decision" so that management is no longer seen as chaotic? of Tesla's creditworthiness shows that Tesla has an excellent ability to current connections, despite the misguided coverage of the same badysts and media that shape the stories surrounding the Tesla tragedy, especially about "running out of money".

In addition, Moody's did not seem to indicate factors likely to result in further degradation or upgrading.

In summary, Moody's is not responsible for failing to improve Tesla's debt rating after production rates have reached the set targets, not Moody's expectations, and that Tesla has maintained good liquidity and liquidity. positive cash flow in the second half. Plus, Moody's is not very transparent in choosing to focus on subjective qualitative evaluations more than objective quantitative badessments solvency. Finally, Moody's is not transparent or accountable if it does not publicly indicate what could lead to further deterioration or increase in Tesla's debt.

The moral of this story is that investors must remain diligent by not relying solely on authority or narrative weavers to make their investment decisions. These are not the badysts, the media conversation heads, the Twitter trolls or even Moody's, who should apparently be behind your opinion. Instead, investors should review the same raw information as all these commentators and make their own opinion.

PS for Elon Musk

With all due respect, Mr. Musk, your recent actions have fueled the fire. Although Tesla does not face a cash or liquidity problem, drastic price cuts and quick decisions that change in a week (store closures) tend to worry investors, badysts and the media. Something must be done about the seemingly common leadership departures at Tesla, even though the media is inflating the number of departures in the minds of people through availability and is covering Tesla departures more than people. other companies. In addition, your relationship with the SEC has hurt investors and increased risk. Even if you think it is unfair, it may be better to simply comply with the SEC's orders very strictly. In other words, even when critics are unfair, depart from criticism and give them less to criticize.

Keywords: Adam Jonas, Bernstein, Cowen & Co., Elon Musk, Gene Munster, Jeffrey Osborne, Moody's, Morgan Stanley, SEC, Tesla, Tesla Cash Flow, Tesla Debt, Tesla Financial Data, Tesla Liquidity, Tesla Model 3 , Tesla Model Y, Tesla Profit, Tesla Profits, Tesla Shares, Toni Sacconaghi