Tesla is slated to reopen its flagship Fremont, Calif., factory on Monday—a boost for bullish investors because it sets the company up for another quarterly earnings “beat” and moves the electric-vehicle pioneer closer to another key milestone.
CEO Elon Musk’s push to restart the plant despite stay-at-home restrictions from Alameda County, where the factory is located, has been quite a story. The governor of California, the Treasury secretary, and President Donald Trump have all weighed in, and the county government ultimately agreed to let Fremont reopen if it met standards for worker safety in a Covid-19 world.
Investors weren’t flummoxed by the drama. Since the reopening story escalated, when Musk threatened to sue Alameda over its extension of stay-at-home orders through May 31, Tesla (ticker: TSLA) stock has risen 14%. The Dow Jones Industrial Average is down 0.2% and the S&P 500 is up 1.2% over the same span.
A gain of 14% is a lot. The reopening must be good news. But analysts have consistently said that the drama amounted to little more than a blip for the company in the long run. The plant was always expected to reopen eventually, and any delays were simply seen as shifting sales from one quarter to another.
Still, having the plant back open allows Wall Street analysts to refine their forecasts for second-quarter deliveries, which, right now, are all over the map. Analysts predict Tesla will deliver anywhere from about 40,000 to 90,000 vehicles during the three months ending in June. The average analyst estimate is about 70,000 units for the second quarter. That’s a low number, and below the 88,000 figure for first-quarter deliveries.
The range is wide. Getting the number right matters because Tesla has managed to string together three straight quarters in which its results were far better than analysts expected.
It’s tough to argue that the quarterly results don’t matter. Tesla shares are up more than 210% since Oct. 23, the day of the first of the recent quarterly “beats.”
For the coming quarter, Tesla now looks poised to do it again. Tesla produced about 105,000 cars during the fourth quarter of 2019. The fourth quarter is a useful number because it is the last one before Tesla’s new Shanghai plant came online. Most, if not all, of the fourth-quarter production came from the Fremont facility.
That means Tesla produced about 8,000 cars a week during the fourth quarter of 2019. Tesla also says its new Shanghai plant can manufacture about 3,800 cars a week. What’s more, Tesla ended the first quarter with about 14,000 vehicles in inventory.
All that means Tesla can have, roughly, 90,000 to 100,000 units available to ship during the second quarter. The current analyst consensus now looks low.
Of course, Tesla has to do more than make cars. They have to sell cars. Demand in the second quarter, however, shouldn’t be an issue. Management said on the company’s first-quarter earnings conference call that Tesla ended the period with its highest backlog ever.
The stakes for the coming quarter are a little higher than usual because the auto maker is moving toward the point at which it could be included in the S&P 500.
Tesla produced a profit under generally accepted accounting practices in the first quarter, when it delivered about 88,000 units. If it can do that again, the company will have made enough money during the past four quarters to qualify for inclusion in the market benchmark. That is an event bullish traders have been waiting for.
When companies are moved into an index, it can create a flurry of buying activity as index funds rebalance their portfolios to reflect changes. Over time, being in or out of an index shouldn’t matter. Long-run earnings determine stock prices. But index inclusion, or exclusion, can affect stock returns for a few weeks.
Neither a surprisingly strong result, nor the prospect of inclusion in the index, guarantee the stock will go higher when numbers are reported around the end of July. There is a lot of time between now and then. And the stock will continue to move.
But getting the plant open should help Tesla maintain its hot streak of solid operating results.
Write to Al Root at allen.root@dowjones.com
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May 18, 2020 at 08:21PM
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Tesla's Fremont Factory Is Reopening. Why It's Great for the Stock. - Barron's
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