Merrill, Morgan Stanley wrong about Tesla
Both overestimate the car company's year-end cash position.
Bank of America's (BAC) Merrill Lynch last month reinstated its coverage of Tesla Motors (TSLA) with a "neutral" rating and a target price of $33. Earlier this week, Morgan Stanley (MS) raised its rating from "underweight" to "overweight" and increased its target price from $45 to $50.
Both reports included a fundamental financial modeling error that overestimates Tesla's year-end cash position by roughly 200%.
The error was simple. Both firms accounted for expected sales and expected new reservation payments during the second half of the year. Neither firm properly accounted for the fact that reservation payments and cash will decline by $40,000 for each Model S Signature Edition and $5,000 for each additional Model S Tesla deliveries this year.
Merrill Lynch forecast 2012 Model S deliveries of 5,000 units. Reservation deposits for the first 2,000 Model S Signature editions were $40,000 each for a total of $80 million. Reservation deposits for the next 3,000 standard Model S versions were $5,000 each for a total of $15 million more. Overall, the total Merrill Lynch error was $95 million. Morgan Stanley was more conservative at 2,230 Model S deliveries. So its error was $81 million.
As of June 30, Tesla reported $211 million in cash, $133 million in reservation payments, $31 million in working capital and $62 million in stockholders' equity.
In its report, Merrill Lynch forecast a second-half loss of $129 million and year-end balance sheet values of $149 million in cash, $242 million in reservation payments, a working capital deficit of $86 million and a stockholders' equity deficit of $54 million.
Similarly, Morgan Stanley forecast a second-half loss of $158 million and year-end balance sheet values of $132 million in cash, $169 million in reservation payments, a working capital deficit of $127 million and a stockholders' equity deficit of $74 million.
Since June 30, I've been cautioning readers that Tesla's working capital would be eradicated by the end of July, its stockholders equity would be obliterated by the end of August, and its planned cash low point left little or no room for errors, delays or other uncertainties.
I was surprised when two of the most highly regarded investment-banking firms in the country didn't share my reservations. Now I understand why and so do you. Their financial modeling was catastrophically wrong and Tesla's year-end cash balance is on track to come in at about a third of the estimates disseminated to their clients.
Disclosure: I have no direct or indirect interest in Tesla, and I have nothing to gain or lose from its success or failure.
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John has been a constant gloom and doom prophet for Tesla for years now and his articles are legion. In spite of that, if you put in a reservation now, you'd be lucky to get your car by this time next year, they are that far out sold in advance. Demand has been good, the company has performed flawlessly in producing not just a great electric car, but one of the best cars of any type in the world.
Tesla is currently developing two new vehicles - an SUV based on the S class chassis, and their third generation platform which will drop the price down to a mainstream price. That platform will likley include a second generation Roadster.
Given that the company is going to be sinking every bit of it's resources into growth and R&D, I'm not surprised at the numbers above. Elon is cutting it pretty fine, but he's executed to plan on multiple ventures over the years.
- Stock holder and S Class reservation holder.
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