Tesla Remains Profitable; Generates Good Q3 Cash Flow
After taking Tesla out from under review as explained in our Oct. 19 note to upgrade its moat to narrow from none, our new fair value estimate is $319.
Tesla TSLA reported a good third quarter with adjusted diluted EPS of $0.76 beating the Refinitiv consensus of $0.57 and up from $0.37 in third quarter 2019. After taking Tesla out from under review as explained in our Oct. 19 note to upgrade its moat to narrow from none, our new fair value estimate is $319. About 41% of the increase from our prior $195 valuation is from the moat upgrade, while nearly all the rest is from increasing our total vehicles delivered through 2029 by about 37% to 22.7 million. This change leads to more scale and an increase in our midcycle operating margin to 12% from 11%.
Our 2021 vehicle deliveries are now 950,000 instead of 800,000 and for 2022 we now model about 1.6 million, up from about 1.15 million. Tesla’s annual capacity is increasing rapidly and the earnings release has it currently at 840,000. With new plants partially opening in Berlin, Texas, and the Model Y Shanghai plant all next year, we think 2021 deliveries of around one million units are not unrealistic. We then expect another large capacity increase in 2022 as Model Y crossover capacity in each of the three plants above should be at least 250,000.
Tesla will need to have demand to keep plants utilized but demand continues to not be a problem with third quarter deliveries up 43.6% to 139,593. Free cash flow for the quarter was solid at about $1.4 billion, up about $1 billion year over year, but got help from $397 million in emission credit sales. We calculate Tesla’s pretax income at $158 million excluding credit sales. Still, thanks to the September $5 billion equity offering, Tesla’s second of the year, cash at quarter-end was very strong at $14.5 billion and management guided for 2021 and 2022 capital expenditure to be incrementally higher (we assume from 2020 levels) by $2 billion to $2.5 billion. We don’t see Tesla in a liquidity crisis next year and if it was running short of funds, we think it can easily raise capital.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.