Blain's Morning Porridge - March 28th 2018 - This morning its all about Tesla - watch the bond p

Blain’s Morning Porridge – 28th March 2018

“If my calculations are correct, when this baby hits 88 miles per hour, you’re gonna see some serious sh*t...”

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.

If yesterday’s thin and weedy stock action wasn’t a definitional dead-cat bounce.. then what is?

The auto business is an incredible thing. There are reckoned to be some 2 billion vehicles around the planet. Global demand is around 100 million units per annum. Yet, 99% of car companies go bust. De Lorean is just one of the many car makers on the list of heroic auto-failures. Apparently, over 3000 ventures building and selling automobiles have gone bust since the invention of the internal combustion engine.

The main story overnight is Tesla. Yesterday was not a good day for the stock or its bonds. The bonds are the ones to watch – they could pull the company down. Downgraded yesterday to B3 (Very High Credit Risk – Poor Standing) and on negative watch by Moody’s for a dink to CCC, the TSLA 5.3 8/25 crashed 3 points y’day.

Moody’s quotes the shortfall in the Model 3 production numbers, and “liquidity pressures” due its “large negative free cash flow and pending maturities”. Its’ certainly unusual for a CCC rated junk rated company to have $10 bln of outstanding debt, and a market cap of $50 bln!

What’s gone wrong?

Just a few weeks ago we were all cheering when Elon Musk’s sparkly new heavy lift rocket sent his Tesla Roadster on an orbit to Mars. (Actually, someone has calculated there is a good chance it might hit Earth in 2199… but that’s not an enormous threat.) A few years ago, (when he gave away all the company’s IP patents, Elon wrote “it is impossible for Tesla to build electric cars fast enough to address the carbon crisis”, inviting other makers to follow his model.

Tesla has failed to make good on its 2500 new cars per week, it haemorrhaging key staff, and it needs upwards of $2 bln new capital to see it through looming redemptions and ongoing cash burn. We all know it has taken loads of customer deposits for cars that aren’t yet getting built, and its worth a multiple of old-school car companies selling literally millions of vehicles… It has not made a penny of profit – so hasn’t been taxed!! (And that’s worth thinking about..)

There has been a raft of negative news stories this week. They include the bond downgrade, but also banks downgrading the stock, the investigation of a fatal crash in California, and some unsubtle jokes about Tesla bond yields comparing to Columbia. I’ve put links to three views on Tesla below – they are all negative, but give them a read.

https://www.forbes.com/sites/jimcollins/2018/03/27/teslas-weak-financials-are-finally-being-exposed-in-its-stock-price/#6aa985b275f2

https://seekingalpha.com/article/4096526-5-principal-reasons-still-short-tesla

https://www.zerohedge.com/news/2018-03-26/tesla-without-any-doubt-verge-bankruptcy

However, Tesla has changed the car market – there are a quarter million of them on the roads, creating a whole new aspirational segment of the car market the big autos have no choice but to follow. Half a million customers have put down deposits for the M3! Although Tesla is missing its production targets, current projections show it will get there relatively soon – ironing out the problems and making its automated lines work. Does that make it a perfect company? Nope – its got clear and serious problems – just like every other auto company that has had to go cap in hand to government, or fiddle their diesel emissions… etc. No one is perfect.

Problem is Tesla is just a car maker. Sure, its popularised the Electric Car as a luxury product and built a brand – but from next year all Volvos will be electric, and when I was a kid the big-bumpered Scandy Boxes were pretty aspirational vehicles. Other manufacturers are now spending time and money to make better Teslas. Can Tesla deliver before the others catch them? Its best asset is probably Musk – and we know his head isn’t 100% in it.. he’s looking at Mars..

My mate picked me up his Tesla the other week to drive down to the Yacht Club. He had to charge it up – so we parked it half a mile away at the village’s only charger and walked in the rain…. I’m told other car companies have agreed a new common charge port standard that will fit most electric cars. Is Tesla going to be the next BetaMax? (If you are under 40 Google it..)

We’ll be keeping a close eye on the bonds – call if you need an update.

No Porridge Tomorrow – Have a peaceful Easter. I shall be out Sailing….

Bill Blain