Optimism for Ford, Less So for Tesla

David Whiston: Telsa, Ford, and GM all made a lot of news in the their first-quarter results that have been reported over the past week or so. Starting with Telsa, who reported first: Elon Musk had guided to a loss for the quarter--that did indeed come true. They did badly miss consensus, however, and they're certainly having a lot of problems being able to meet demand in all geographic regions of the world, for the Model 3 at the same time. That's a problem that's not going to go away anytime soon. The issue here, of course, is for now, cash burn. They did have their cash balance from year-end decrease from $1.5 billion, and Musk did really reverse course on being willing to raise capital. He has recently said he wasn't going to. And instead they announced on May 2 that they're issuing about 1.5 billion in convertible debt due in 2024. And roughly 800 million of oversubscribed common stock. I had added about $2 billion into my model for capital raise. I assumed all equity, and I'd prefer, frankly, they did all equity. I don't want to see this balance sheet taking on more debt, but for now that's going to ease some cash flow concerns, and the stock did rally on the news. They saw a lot of problems, though, with the Model S and X combined. Those deliveries have been down year over year three of the past five quarters. It's an older vehicle. They did improve the range recently, but for now they've just gotta get more Model 3 volume going and get it going ASAP.

For Ford, though, it's a more optimistic story. They actually had a really good quarter. They beat consensus pretty handily. The story here is pickup trucks. The F150 is still fairly old, especially relative to GM's new truck. They had adequate inventory and really strong pricing, and North American earnings were up 14% year over year. I would caution, though, it's probably going to be the best quarter of the year for Ford. They're going to have a lot of launch costs for all these various crossovers they've got coming out. They've the Escape Explorer, some Lincoln crossovers. Then next year, you've got the Bronco and the new generation F150. These are very profitable vehicles, but you still have to go through some launch costs to get up to speed before all the cash starts coming in. So don't expect the rest of 2019 to be as quite as good for Ford as it was in Q1. Management did raise their guidance, though, and is expecting year-over-year improvement, whereas before they were just saying 2019 would potentially be better than 2018. The other interesting thing from Ford is that they announced a $500 million investment in EV startup, Rivian Automotive, also based in Michigan. This was apparently GM's deal to lose, but they couldn't work out a deal, and Ford swooped in and quickly worked out a deal. Ford executive Joe Hinrichs, president of automotive, will also be joining Rivian's board. Ford's going to use a so-called Rivian skateboard platform to have Ford be EV. This will enable Ford to get a vehicle out to market faster than they could on their own. Purely off our operational point of view, I don't think they necessarily had to do this deal, but it makes some splashy headlines, it aligns them with the company that some think is the next Telsa, and a $500 million investment that could certainly be worth a lot more than $500 million over time.

Staying in Detroit, GM reported and their numbers, as they had guided, first quarter would be the weakest, and it was indeed. They did beat consensus pretty handily, but if you back out a $0.31 EPS noncash gain from mark to market adjustments on their stake in Lyft, which just went public, and also Peugeot warrants that they got in August 2017 following the Opel/Vauxhall sale. They missed consensus by a penny backing out those gains. Things will get better for GM as the year unfolds, though. The pickup truck inventory will be at full strength for the new truck right around middle of second quarter. They focused on Q1 just on the crew cab production and just started regular and double cab production in March. So it takes some time to ramp up for that. You'll have some launch costs for the heavy duty truck later this year, too. I think, overall, you're gonna have a nice cash flow story improving for GM throughout 2019. The mark to market adjustments are going to keep coming back every quarter as long as they own their stake in Lyft and the PSA warrants. The PSA warrants they have to keep for a number of years still under the contract terms. But the Lyft stock they have, I believe, a six-month lockup period on those shares, and Lyft has not done well in the second quarter. So I'd be looking for a noncash loss in Q2 results on that Lyft stake.