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.
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, 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.