Published on July 12th, 2018 | by Eric Kosak0
Tesla Automotive Earnings Per Share (EPS) Estimate For The 2nd Quarter Of 2018
July 12th, 2018 by Eric Kosak
• My adjusted EPS for the first and second quarters of 2018 are positive.
• My adjusted EPS prediction for the automotive segment and only the automotive segment is a positive $6.89 for the second quarter of 2018. The similarly adjusted EPS using reported production numbers is $6.08.
• My adjusted EPS prediction for the automotive segment and only the automotive segment after interest income, other expenses, and an assumed provision of a 20% income tax is a positive $5.32 for the second quarter of 2018. The similarly adjusted EPS using reported production numbers is $4.67.
A couple of weeks ago, I made an EPS prediction for Tesla’s second quarter. At the time, I said, “the key disclosure this quarter will be the number of cars produced. I am expecting almost twice as many cars produced in the 2nd quarter compared to the first quarter. My EPS prediction relies on cars produced.”
I was expecting Tesla to produce 57,174 cars during the second quarter. However, Tesla produced 53,339 cars in the second quarter. The difference between my expectation and the actual number of cars produced was 3,835 cars. Tesla produced 18,845 more cars during the second quarter than in the first quarter (53,339 minus 34,494). This is an increase of almost 55% more cars produced during the second quarter (53,339) compared to the previous quarter (34,494).
The tables below show the number of cars delivered (29,997) during the first quarter, but they show cars produced (53,339) during the second quarter. This is quite unconventional. However, the reason for this apples-to-oranges comparison is necessary in my opinion due to the distortion created by the federal tax credit.
As I mentioned before I believe that Tesla was stockpiling cars in order to benefit from the federal tax credit until the beginning of the third quarter. Thus, it was avoiding car deliveries, on purpose, in the USA in order to avoid triggering the quota limit of 200,000 during the second quarter, and the only way to avoid triggering this limit was by delivering fewer cars in the USA during the second quarter.
Tesla delivered 40,740 cars during the second quarter. This under normal circumstances would make no sense, since these deliveries represent ~76% of cars produced (40,740 divided by 53,339). Compare this, for instance, to ~87% of cars delivered from cars produced during the first quarter (29,997 divided by 34,494). This is a drop of ~11% in deliveries.
In absolute numbers, during the second quarter, 12,599 cars, or 24% of those produced (12,599 / 53,339), were not delivered. For a company declaring its intent to become profitable, not delivering merchandise produced seems to make no sense unless the quota limit imposed by the federal tax limit is considered as the main cause of not delivering merchandise.
So, I hope you will bear with me while I proceed with this apples-to-oranges comparison. I could just as easily have changed the first quarter’s numbers to cars produced as well, but this would have brought numerous distortions into this analysis.
Therefore, I hope you will bear with me for this uncommon comparison. Once I am done, you can easily reduce the result by 24% if you so desire.
As I mentioned before, I think Wall Street is way too negative on Tesla, and this can easily be seen by the stock price decrease since Tesla announced production and delivery results. What basis do I have for saying this?
Tesla delivered 101,312 Model S and Model X cars during the year 2017. This is a 33% increase of these two models compared to 2016. In the first two quarters of 2018, Tesla produced 83,336 cars (Model S, Model X, and Model 3 cars ). I for one believe that Tesla will produce more than this in the second half of 2018, but assuming it can only produce as many cars as it produced during the first half of 2018 for the remainder of the year, then this would represent a 64% percent increase of all cars produced in 2018 compared to cars delivered of Models S and X in 2017. I know I am comparing oranges to potatoes now, but I think you get the general idea.
In the year 2017, Tesla delivered 33% more cars than in 2016, and this year Tesla is on track to deliver at least 64% more cars than in 2017. Who wouldn’t want to be part of a story like this? Well, apparently, some people on Wall Street does not want to be part of this story. Go figure. In fact, this might make sense if demand was decreasing. However, there are said to be 420,000 Model 3 reservations — if you subtract recent deliveries from Elon Musk’s last statements regarding the reservation number.
I know I am comparing deliveries versus production and two models versus three models. However, you have to look past these nitty gritty details. The bigger pictures are cars made versus cars made. You cannot deliver without producing first, and there is still the issue of average selling prices, and the issue of Tesla hiring more workers, and the issue of Tesla firing more workers. All companies have to deal with these issues. However, how many companies do you know that can increase their volume of product in similar numbers. Enough said.
At the time, I said that I “expected EPS of
$6.95 $6.89 before one-time item lines for capital expenditures (including the tent assembly line and Tesla Grohmann Automation expenditures), restructuring expenses (including recent layoffs), and other one time item lines, and assuming Tesla did not issue more stock since last quarter which seems unlikely given their employee stock participation policy, and in addition, the layoff issue might include issuing stock for employees that are leaving.
“However, until disclosed, it is difficult to predict the number of issued stock for the second quarter which might decrease EPS by up to 42 cents if ten million weighted basic and diluted additional shares were issued.”
“The EPS prediction of
$6.95 $6.89 is for 13-weeks of production of cars. If less work weeks are included in the second quarter, then this will affect the EPS. For instance, the EPS prediction decreases to $6.06 $6.01 for 12 weeks of production of cars and to $5.18 $5.12 for 11-weeks of production of cars.
“It does not include the energy generation & energy storage division, or the services and other division, but it does include the car sales segment (or automotive sales line item) without leasing.
“In addition, this prediction is for produced cars. It is not for delivered cars. I believe that Tesla has been stockpiling cars in order to benefit from the Federal tax credit until the beginning of the third quarter.
“This will make their sales look smaller for this quarter, and this will not matter that much by the time of closing their books for the year since actual, massive deliveries will be made in the first two weeks of the 3rd quarter, and Tesla will receive payment for these cars around the time of delivery, and this will move sales from this quarter to the next quarter, but these are just accounting movements from one quarter to another.
“However, the key disclosure this quarter will be the number of cars produced. I am expecting almost twice as many cars produced in the 2nd quarter compared to the first quarter. My EPS prediction relies on cars produced.”
I made several mistakes in the EPS prediction in trying to report these in time as a prediction rather than after the fact, and these changes are shown in the final row below. I added income taxes rather than subtracting them in the third column from the left for the first quarter, and I changed average selling prices and the percent of the cost of materials from ASP for Model S and Model X. These changes are shown in the sixth and seventh column below.
The reason for changing the ASP and the percent of the cost of materials from ASP for Model S and Model X was to have the same numbers. Having the same numbers permits an easier comparison.
My EPS prediction ($6.89) differs from the EPS resulting from the reported ($6.08) car numbers by $0.81, and the percentage change decrease from my prediction is around –12%Δ. My EPS error is almost twice as big as my predicted number (57,174) for cars produced (around –7%Δ).
The table below shows three columns for the first quarter and three columns for the second quarter. The first two columns show the difference between adding and subtracting reported income taxes for the first quarter. The third column shows the effect of not applying all of the operating expenses to a single segment. The operating expenses are the same as those shown in the article on labor. These are the salaries of people which I have classified as indirectly involved in manufacturing cars. The rest of operating expenses are excluded from this calculation.
Doing this shows that the automotive segment actually contributed to profits during the first quarter. In the first quarter, the automotive segment contributed earnings per share of $1.21. Please keep in mind that these EPS are different from reported EPS, and they are different from Wall Street analysts’ estimates of EPS. Reported EPS include other business segments, such as energy storage and other line items such as non-controlling interests.
After interest income, other expenses, and an assumed provision of a 20% income tax, the EPS for the automotive segment are decreased to $0.78 during the first quarter of 2018.
The three columns for the second quarter are organized in a similar way to the those reviewed for the first quarter. The first column for the second quarter shows the effect of applying the full expense for operating expenses without adjusting for the salaries of those involved indirectly in car manufacturing. Interestingly, the automotive segment shows a positive EPS of $1.35.
After interest income, other expenses, and an assumed provision of a 20% income tax, the EPS for the automotive segment are decreased to $0.88 during the second quarter of 2018.
The second column for the second quarter shows the effect of applying the expense for operating expenses adjusting for the salaries of those involved indirectly in car manufacturing. The rest of operating expenses are excluded from this calculation. This shows that the automotive segment had an EPS of $6.89 during the second quarter of 2018.
After interest income, other expenses, and an assumed provision of a 20% income tax, the EPS for the automotive segment are decreased to $5.32 during the second quarter of 2018.
The third column for the second quarter shows the effect of applying the expense for operating expenses adjusting for the salaries of those involved indirectly in car manufacturing. The rest of operating expenses are excluded from this calculation. This shows that the automotive segment had an EPS of $6.08 during the second quarter of 2018. This column is based on the actual reported number of cars produced.
After interest income, other expenses, and an assumed provision of a 20% income tax, the EPS for the automotive segment are decreased to $4.67 during the second quarter of 2018 using the actual reported number of cars produced.
To maintain the ability of seeing changes as they occur from column to column, the average selling price was kept the same as well as the cost of materials. The actual reported results for the first quarter (first two columns) were used in order to finetune these numbers for the rest of the columns.
The cost of capital and labor was, also, kept the same. They do, however, vary between the columns depending on the number of cars produced (or delivered).
I hope this EPS prediction has helped in providing guidance for Tesla’s automotive segment. For me, personally, it has provided comfort in the knowledge that Tesla’s automotive segment is financially viable and sustainable in an environment of continually negative news from established financial houses and news outlets. I would like to know what you think about it.
Disclaimer: I have, sadly, no positions in the stock of this company. The above is not a recommendation for investment. If you seek investment advice consult with a professional, and if you do invest, then do it wisely and without allowing the loss of any of your investments to injure you financially. Remember that money invested in the stock, bond, option, futures, and real estate markets can and might go to zero.