Tesla Motors Inc.'s Earnings May Be Easier to Guess Than You Think

Often with a company like Tesla (NASDAQ: TSLA  ) , guessing the earnings per share in a report a month in advance of its release can be as difficult as guessing the weather. There are so many rapidly changing metrics with this company that it seems an overwhelming effort to keep up with all of them. However, this time around Tesla has dropped enough specific clues that makes estimating the earnings per share for its fourth quarter a fairly easy task.

Calculating earnings
In order to make a reasonable estimate on earnings for Tesla, there are four basic parts you need to know, or at least be able to make a rational estimate of. They are sales, total overhead expense, interest expense, and gross profit, research, and development expense. For purposes of this exercise, let's assume that the $2.2 million in interest expense of the prior quarter is consistent with the fourth quarter (all figures in this article are non-GAAP).

Start with sales
Tesla CEO Elon Musk recently announced that the fourth quarter had 6,900 car deliveries. In order to arrive at the total revenue figure, you need the average selling price for each of these vehicles. In the last quarter's earnings release, Tesla stated that "[average selling prices] are expected to be relatively
flat sequentially as we continue to see a rich mix of options on incoming orders." Based on that, simply grab the average selling price of the third quarter and apply it to the fourth quarter.

Last quarter, Tesla reported 5,500 deliveries on $603 million in revenue. This comes out to around $109,600 per vehicle. Based on 6,900 deliveries for the fourth quarter, we should therefore expect revenue of around $756 million.

Gross profit
Tesla set a target of 25% gross margin on sales for the fourth quarter. Twenty-five percent of $756 million comes out to $189 million in gross profit; from that $189 million, subtract out R&D, overhead, and interest.

R&D plus overhead
Tesla said to expect a 25% increase in R&D expense and a 20% increase in overhead. Those amounts were $48 million and $67 million last quarter, respectively, so expect them to be $60 million and $80.4 million for this quarter, for a total of $140.4 million.

Subtract the $140.4 million from the $189 million in gross profit, then take away the $2.2 million in interest expense -- based on Tesla's disclosures and forecasts, the result is $46.4 million in earnings (assuming Tesla meets its expectations, which it rarely misses).

Per-share-earnings estimate
Based on 139 million fully diluted shares, look for Tesla to post at least $0.33 in earnings per share compared to analysts' estimates of $0.16 per share at the time of this writing.

Where the estimate of $0.33 can be wrong, aside from higher than expected expenses or lower than expected selling prices, is in the possibility that Tesla willfully decided to increase R&D or its Supercharger network build-out more aggressively than originally intended in response to the increased earnings and positive cash flow from the quarter.

Foolish final thoughts
For the foreseeable future, Tesla's demand eclipses its production capacity. As such, there is no seasonality with the quarterly results and each report should therefore be compared to the quarter immediately prior in order to measure progress. Therefore, annualizing the most recent quarter's adjusted earnings gives a reasonable run rate. If the $0.33 estimate proves to be accurate, it would put Tesla at an annual rate of $1.32 per share in earnings.

With a $170 share price, the P/E would still seem to be too high at 129. Still, that's a lot better than the last quarter's annualized P/E of 354, so it would be a sign that earnings may be on their way to reasonable valuation territory. The outlook for the first quarter and beyond coming with the earnings report should be interesting. Being long Tesla may not be for the faint of heart, but betting against it appears far more dangerous if earnings double.

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Read/Post Comments (13) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On January 29, 2014, at 7:31 PM, Decoy0527 wrote:

    Anyway you look at it, Tesla seems priced to perfection. Most Elon Musk admirers would say he has been perfect for 4 consecutive years so the stock price is warranted. I think it gets harder as the company gets larger and some world class manufacturers with deep pockets take notice of that niche market. Time will tell, but I'm not buying anywhere near its current price.

  • Report this Comment On January 29, 2014, at 7:39 PM, AjitC wrote:

    Tesla has been accelerating the deployment of SCs. Sometimes they are lighting 1 SC/week day. Actual rate is much slower. 100 SCs/year mean $15M... peanuts. Anyway, this is money that is capitalized and probably depreciated over 5 years or more.

    The increase of R&D and plant investment for Model X should be quite significant. Considering that Tesla has spend some money on R&D, dies, share common components, etc, I think they will have to spend $300-400M total, just based on what they spent on Model S. Some has been spent already. I estimate Tesla spent over $1B on equipment for the Model S, including inventory.

    Elon Musk has been cautious about burning cash flow. I figure he will try to get the most bang for the buck.

    The good part is that costs will drop with volume of Model S, X. Gross margins could hit 30%. I would like to see them sell 50,000 autos this year and 100,000 next year.

  • Report this Comment On January 29, 2014, at 7:54 PM, SteveTG3 wrote:

    @Decoy, "priced to perfection"

    based on what assumptions?

    how many Model S/X do you think they'll sell when they reach full production capacity around 2016?

    how many Gen III cars do you think they'll sell when they have the capacity to use as much of the Fremont plant as demand calls for?

    "world class manufacturers with deep pockets?" I've not seen a 200+ mile EV concept car from any of these players... so if they wake up tomorrow suddenly inspired to go after such a product, at best it will be out the same time as Gen III in 2017. More to the point, if Gen III delivers BMW 328i performance for $35K, and an incumbent can match this... all the sooner ICE sales will go to EVs. That is another car with this kind of price and performance would not take sales from Tesla, with sales such outstanding EVs would take sales away from a wide swath of the ICE market.

  • Report this Comment On January 30, 2014, at 11:11 AM, countrarian wrote:

    I'm a little confused here:

    From the author, in this article:

    "Last quarter, Tesla reported 5,500 deliveries on $603 million in revenue."

    From Telas 10-Q filing 11/8/3:

    "During the three months ended September 30, 2013,we recognized total revenues of $431.3 million"

    What am I missing?

    (obviously if the authors basic suppositions are wrong then the thesis of her article is void)

  • Report this Comment On January 30, 2014, at 3:54 PM, Jim5437532 wrote:

    Tesla and their minions are less then truthful with safety statistics. I think the Tesla model S. is fairly safe, but not as safe as Tesla and their minions of spammers portrays it to be. Many including myself, think Tesla's hyping of safety statistics is false advertising. Typical corporate greed and disregard for public safety.

    "IT IS MY OPINION THAT, TESLA IS FRAUDULENTLY MISREPRESENTING STATISTICS AND THE SAFETY OF ITS VEHICLES. IT IS MY OPINION, IT IS FALSE ADVERTISING AGAIN. AFTER THE FIRST TESLA BATTERY FIRE ON OCTOBER 1, 2013: ON OCTOBER 4, 2013 ELON MUSK & TESLA MOTORS CLAIMED "YOU ARE 5 TIMES MORE LIKELY TO EXPERIENCE A FIRE IN A CONVENTIONAL GASOLINE CAR THAN A TESLA!" AFTER THE THIRD TESLA BATTERY FIRE ON NOVEMBER 19, 2013: ON DECEMBER 23, 2013 TESLA MOTORS CLAIMED "TESLA VEHICLE IS OVER FIVE TIMES LESS LIKELY TO EXPERIENCE A FIRE THAN THE AVERAGE GASOLINE CAR" I THINK TESLA MOTORS IS YET AGAIN USING FUNKY STATISTICS TO MISREPRESENT AND OVERSTATE THE SAFETY WORTHINESS OF ITS VEHICLES. AFTER THE THIRD TESLA BATTERY FIRE, TESLA WAS AND IS STILL USING STATISTICS THAT SEEMINGLY ONLY FIGURED ON ONE TESLA BATTERY FIRE, RATHER THAN ALL THREE."

    http://www-odi.nhtsa.dot.gov/owners/SearchResults?searchType...

    "AFTER THE FIRST TESLA BATTERY FIRE ON OCTOBER 1, 2013: ON OCTOBER 4, 2013 ELON MUSK & TESLA MOTORS CLAIMED "YOU ARE 5 TIMES MORE LIKELY TO EXPERIENCE A FIRE IN A CONVENTIONAL GASOLINE CAR THAN A TESLA!""

    http://www.teslamotors.com/blog/model-s-fire

    "AFTER THE THIRD TESLA BATTERY FIRE ON NOVEMBER 19, 2013: ON DECEMBER 23, 2013 TESLA MOTORS CLAIMED "TESLA VEHICLE IS OVER FIVE TIMES LESS LIKELY TO EXPERIENCE A FIRE THAN THE AVERAGE GASOLINE CAR""

    http://www.teslamotors.com/about/press/releases/nhtsa-reaffi...

    If we assume the base statistics are accurate, if we add in the 2 newer Tesla battery fires, if my math is right the second figure should be Tesla vehicle is over 1.666 times less likely to experience a fire than the average gasoline car. That's significantly less than what Tesla and their minions of spammers claims.

    Teslas are rather new vehicles. If gasoline vehicles of the same age range as Tesla's vehicles are compared to Tesla, gasoline vehicles MIGHT be less likely to catch fire than a Tesla.

    The greedy haters will probably attack my posts as usual. They can't handle the facts, intellect, free speech, free press and logical thinking.

  • Report this Comment On January 30, 2014, at 4:07 PM, nickeyfriedman wrote:

    countrarian,

    From the article: all figures in this article are non-GAAP.

    The 10Q is the GAAP numbers. Tesla reports in its press releases non-GAAP numbers as well. Those are the numbers the analysts follow and make estimates based on. My article discusses the non-GAAP numbers.

    I hope this helps.

  • Report this Comment On January 30, 2014, at 6:53 PM, nonqual wrote:

    Mr. Friedman:

    Included in your non GAAP Q3 revenue of $603 million are $7million for RAV4 EV power trains, $11 million for ZEV credits, $15 million in GHG/CAFE credits, and $1 million for Development Services. Wouldn't it be better to subtract that $34 million before multiplying by the 6,900/5,500, then add it back in.?

    Where do you get $2.2 million for interest expense? I see $6.5 million in Q3.

    In Q3, Tesla subtracts $21.5 million from expense for stock compensation (non-GAAP). Do make any adjustment for stock based compensation in your analysis?

    When makeing comparisons to prior periods and projections for future periods is non GAAP used?

    Where can one find both GAAP and non GAAP projections?

    Why does anyone bother with when non GAAP yields so much more favorable results?

    Thanks in advance.

  • Report this Comment On January 30, 2014, at 6:54 PM, StephenPace wrote:

    @Jim5437532 You post this same comment on every Tesla article. If there is a safer car, please let us know. The reality is, NHTSA will report soon and they have a lot more detail on Tesla crashes to date than you do, and I expect they will return a completely clean bill of health on the car similar to the German authorities. When that happens, I expect you will be very sad, but you'll have your answer on safety.

  • Report this Comment On January 30, 2014, at 8:22 PM, nickeyfriedman wrote:

    @ nonqual,

    It's Ms. Friedman, not Mr. Friedman. I had hoped my female avatar would have made that clear.

    See the last page of the earnings PR for a reconciliation of non-GAAP vs. GAAP. You'll notice stock-based compensation is excluded from non-GAAP. You should also notice there that $4.3 million of interest is excluded from non-GAAP.

    The margins exclude ZEV credits.

    As far as I recall, Tesla did not give any GAAP guidance anywhere. All of my figures and projections are based on non-GAAP which are too Tesla's various projections either spelled out by Tesla in the above link or implied with the context of the paragraph.

  • Report this Comment On January 30, 2014, at 8:23 PM, nickeyfriedman wrote:
  • Report this Comment On January 30, 2014, at 9:23 PM, nonqual wrote:

    Ms. Friedman:

    Thank you.

    My apology for mistaking your gender. (I generally fail to look at the right column on the MF page,maybe because I am more focused on reading the article and comments.) I also apologizing for failing to see you had deducted the non-GAAP component from the individual expense categories. (My focus, wrongfully, was on the information on the income statement page not the recociliation several pages later.)

    I have the impression projected GM excluded ZEV credits because the quantity under the existing contract would have been completed by the 4th quarter. I also believe the Toyota contract runs through mid 2014 and the GHG/ CAFE credit contract runs through the end of 2014 . Maybe it all works out in the 20% of over prior revenue guidance (that I can't find.)

  • Report this Comment On January 30, 2014, at 11:40 PM, nickeyfriedman wrote:

    @nonqual,

    The PR I linked states that the GM excludes ZEV credits:

    "While we expect to achieve our target of 25% non-GAAP automotive gross margin in Q4 (assuming no contribution from ZEV credits), further progress is likely if customers continue to purchase our vehicles with a high option take rate.

    Model S in London for Store Opening"

    This actually implies gross margin will probably top 25%. How much though it's hard to tell. 25.5%? 26%? 30%? 25.01%?

    Perhaps the surprise production increase was able to realize another leg up on gross margin. Hmmm. If I can dig up more detail it could become another article.

  • Report this Comment On January 31, 2014, at 8:58 AM, Jim5437532 wrote:

    @ StephenPace

    Statistically the Tesla is more likely to catch fire and explode than other EVs. Statistically I suspect the Tesla is more likely to catch fire and explode then the Ford Pinto. The NHTSA has found enough cause of danger to warrant an investigation into the Tesla battery fires and explosions. I doubt the NHTSA would give the Tesla model S. battery fires a clean bill of health unless NHTSA is paid off or otherwise biased.

    NHTSA and Tesla have found enough of a fire hazard to spend millions recalling about 30,000 Tesla model S' for faulty charger adapters.

    The German authorities didn't really investigate the battery fires/explosions or charge connector fire hazards. The investigations were still ongoing.

    If Tesla wasn't so dangerous, then it wouldn't feel the need to fraudulently represent safety statistics.

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