Are Tesla Analysts Asleep at the Wheel Again?

It was amazing how far off the mark Tesla (NASDAQ: TSLA  ) analysts were regarding the its fourth quarter. The company had dropped enough bread crumbs that anybody who followed the trail could come very close to guessing the non-GAAP results in advance. Now, with its first-quarter report coming soon, estimating the numbers better than the analysts may be easier than you think, and it could give you a powerful edge over the crowd.


Source:  Tesla Motors

How the fourth quarter was guessed in advance
The clues Tesla had left pointed to my estimate of non-GAAP sales of $756 million and earnings per share of $0.33. Analysts had been expecting sales of $686 million and earnings per share of $0.21. Our expectations were worlds apart.

The results? Tesla came in with non-GAAP revenue of $761 million and earnings per share of $0.33. This was a very slight beat on revenue and spot on with EPS compared to my forecast, but an absolute blowout compared to analyst estimates. The stock soared to new all-time highs following the results.

The point is not to toot my own horn (pardon the pun), but to demonstrate how simple it was to guess Tesla's earnings; it may be this easy in the future as well. Last quarter we were given clear clues on deliveries, average selling price, gross profit margin, R&D, as well as selling, general, and administrative expenses.

Tesla didn't leave anything out and probably could have just given the top and bottom number, but the company left it for you to figure out. Plugging in all the numbers provided by Tesla gave the answer in minutes that analysts couldn't seem to figure out (or were sandbagging) all quarter.

Why Tesla's word is reliable
Before we begin, keep in mind that Tesla's guidance figures on various metrics have a history of being reliable when given part way through a quarter. The simple reasons for this are that most of the company's delivery and cost schedules have to be planned well in advance and are therefore rarely a mystery.

On top of that, as time goes by the change in results through the quarters will become less and less volatile. For example, Tesla began 2013 with negative gross profit margins and finished the year with 25% margins. However, the company began 2014 with 25% margins and is only guiding for an improvement to 28% by the end of this year. The smaller the rate of change the easier it is for guidance to be reliable.

First-quarter estimate
First, start with the non-GAAP revenue figure. Tesla guided for deliveries of 6,400 vehicles. Most delivered vehicles have been sold with a high number of extra options, and fetched close to an average price of $110,000 per vehicle. While Tesla didn't come right out and say that the large number of customers opting for options has continued in the fourth quarter, CEO Elon Musk implied it in the conference call.

In the call, Musk stated that the fourth-quarter margin guidance for 2014 "assum[es] that the take rate of options decreases slightly." He also said, "As we reach the broader markets, the option uptake, for example, people ordering, say, performance plus, we expect, will decrease." Tesla hasn't reached the broader or "mainstream market" yet. Musk only mentions the mere possibility of declines in the future. Finally he even leaves the possibility open that the option take won't decrease, but for that to be possible would mean that current deliveries and orders haven't seen any reduction yet.

Knowing this, $110,000 is a reasonable figure to use for the average price of each delivery for a total non-GAAP revenue expectation of $704 million. Analysts have it at $698 million. Our respective estimates are rather close this time. Whew.

Next we have gross profit margins. Tesla said to expect Q1 to be "slightly" higher than Q4's 25%. What does slightly mean? To be prudent, use a flat 25%. This puts the gross profit margin at $176 million.

Total operating expenses last quarter were approximately $145 million. Tesla said that these are expected to grow by 15%, to around $167 million. This puts the operating profit at around $9 million. Using 123 million diluted shares, this brings the non-GAAP earnings per share down to $0.07.

Throw in the some unknown interest expense (this part is hard to calculate this quarter) and possibly some additional unforeseen expenses related to battles with New Jersey and other states, and EPS should come in at something less than $0.07. Analysts on Yahoo are calling for $0.12 at the time of this writing. Unless Tesla reports higher revenue or gross profit margins or lower operating costs than guided, Tesla should miss estimates by a material amount if analysts don't lower their figures.

Foolish final thoughts
Based on this year's current estimates of $1.80, Tesla trades with a P/E well over 100. This suggests it is priced for perfection. If Tesla does in fact miss analyst estimates, it would likely be viewed as far from perfection, and the stock could take a hard hit. Fools may want to consider waiting on the sidelines until after the earnings report and then reevaluate. No doubt Musk and Tesla will leave a trail of fresh clues that will help you estimate the next round.

Another lesson of note that the previous earnings report teaches us is that long-term investors shouldn't rely 100% on analyst estimates. Since they often blow the estimates severely in the short term, their long-term estimates usually suffer as a result, and could very well change dramatically over time. Analysts' estimates could make for a good initial guide for further research, but you should always take them with a large grain of salt; spending some time on your own analysis can often lead to better results.


Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 15, 2014, at 1:50 PM, drax7 wrote:

    The March Norway sales figure of 1493 seems unexpectedly high, that could imply greater sales than 6400 for the quarter.

    That number seems too high to have been planned, unless the rest of Europe was less than expected. Though these cars are made to order, hence it seems shifting from one customer to another less likely.

  • Report this Comment On April 15, 2014, at 2:29 PM, jameshall69 wrote:

    finally, a non hype logical discussion. I saw a very detailed breakdown of Europe sales that put Europe 1Q at 2600 or so, saved by the Norway March number. I then also saw an estimate from a US trade journal of 1700 in March making 4800 for 1Q 2014. This means Tesla sold about 7400 units. this will allow TSLA to claim headlines with hyperbole again about blowing out sales expectations by 15% blah blah without noting they lowball each quarter guidance on purpose. I think the sales # will boost the stock but any delay in the gigafactory plans may mean the 1Q results boost if there is one is short lived.

  • Report this Comment On April 15, 2014, at 3:24 PM, gjsuhr wrote:

    I saw the March Norway sales number - 1493 - and it is huge...so I did some investigating.

    It seems that Norway penalizes ICE cars so much more than electric vehicles that a Tesla Model S that competes directly with an Audi S6 in the US has a price advantage of $112,000 vs $240,000 in Norway. The Tesla is a huge bargain...but it may not last. Existing Norwegian EV subsidies are set to expire shortly, and there is some speculation that new ones will concentrate on lower priced vehicles as the Norwegians aren't really thrilled with subsidizing cars for the rich - even if they are electric.

    A more telling number for Tesla is the sales figure for much larger Germany - 143 - which are nowhere near what they are in Norway.

  • Report this Comment On April 15, 2014, at 4:07 PM, teslaman wrote:

    I read somewhere that there was a big push at the European dealerships at the end of March to make as many deliveries as possible before month's end.

    An eyewitness at one of the Tesla stores said they were "scrambling" all the way up to midnight on the 31rst to make as many deliveries as possible.

    This could mean they were scrambling to meet guidance estimates.

    Or it could mean they were striving to beat guidance by the greatest possible margin.

    I tend to believe they were striving to beat guidance for several reasons.

    First, its been the Tesla trend lately to meet or beat their guidance. They seem to accomplish this effortlessly, so "scrambling" just to meet an already-conservative 6400 deliveries is definitely out of character. Its a routine flyball and Tesla is the equivalent of a superstar outfielder. There'll be no kind of scrambling on this kind of play.

    No, Tesla's days of scrambling to achieve the mediocre are over.

    That means they were "scrambling" for another reason. More likely is that they were in the process of slam-dunking a substantial beat on guidance. I'd estimate 6800-7200 deliveries.

    And second, Tesla would not have begun the production run on the Chinese vehicles until AFTER they met production guidance for the 6400 vehicles meant for Europe and North America.

    It takes about 3 weeks for a ship to cross the Pacific to China. Also, the vehicles bound for China probably spent 1-2 weeks at the marshaling yards before being loaded onto the ship.

    Deliveries will begin in China between April 21rst and 23rd. This means the boat left the U.S. BEFORE the end of March with its thousand-or-so Teslas onboard and that the cars left the factory 1-2 weeks before that.

    Those cars won't be included in 1rst quarter sales of course, but the fact that production on those cars was complete well-before the end of the month means the company was running well ahead of schedule.

    Tesla therefore met the 6400 production guidance at least a week ahead of schedule. And since the company is supply constrained, it is reasonable to conclude that Tesla achieved 6400 deliveries a week ahead of schedule also.

    My guess: Q1 production 8000; Q1 deliveries 7000

  • Report this Comment On April 15, 2014, at 5:06 PM, teslaman wrote:

    All that being said, Nickey, I hope that you are right and that I am wrong. If Tesla meets guidance but misses analyst expectations, it will knock the price of the stock down.

    In this case, I will be able to gobble up more shares and add them to my collection.

  • Report this Comment On April 16, 2014, at 4:05 AM, Batteryprof wrote:

    Beat the estimates will do nothing for Tesla stock as actual stock value is linked to 2020-2025 mass production market ...

    It seems already their estimation for US market was too optimistic ... And Europe too, as incentives are going to slow down especially in Norway.

    Investors become more and more skeptical has Gigafacroy plans looks a little too ambitious when you know the difficulty of battery industry ...

    Additionnally

  • Report this Comment On April 16, 2014, at 4:16 AM, Batteryprof wrote:

    Additionnally, reading other comments:

    If they were able to ship cars in advance in China it means that they don't sell them in US or in Europe and US and Europe production already are on a plateau ...

    Going to China is a good excuse to hide cars in boats because you cannot sell them... To hide declining prodution for US and Europe in my mind.

    It is like if they chose to loose money putting cars in a ship !

    --> It is typical crisis behavior for OEMs when a model doesn't work as expected...

  • Report this Comment On April 16, 2014, at 10:55 AM, teslaman wrote:

    @ batteryprof

    "Going to China is a good excuse to hide cars in boats because you cannot sell them."

    I see. So, during the 1970's, (and ever since) when Toyota, Honda, and Nissan started to get huge sales in the U.S., it was not because those companies wanted ENORMOUS SALES, but rather, they put all those vehicles on those boats to hide them from the Japanese citizenry who could not possibly consume that many vehicles?

    Batteryprof, I've read some kooky things in my life, but that ranks at the top. Tesla announced they were going into China a long time ago.

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