KeyBanc Lowers Model 3 Estimates Ahead Of Tesla's Q4 Report

Tesla Inc TSLA’s Model 3 deliveries will arguably be the most closely followed metric when the company’s fourth-quarter earnings are reported after the bell Wednesday, and sales do not look good, according to KeyBanc Capital Markets.

The Analyst

Brad Erickson maintains a Sector Weight rating on Tesla.

The Thesis

After speaking to 16 sales centers in the U.S., Erickson said he saw few signs of progress with the Model 3 delivery ramp.

“Half of the sales centers we spoke with have only seen a few deliveries cumulatively, and the majority commented that employee cars continue to make up most of them,” the analyst said in a Tuesday note. (See Erickson's track record here.)

Most California stores are seeing six to 10 deliveries per week, with stores outside of the state seeing less than five deliveries per week, Erickson said. KeyBanc lowered first-quarter Model 3 estimates from 13,000 to 8,500.

" ... We believe current run rates likely point to a number closer to the 5,000 range, but obviously, we expect progress to be made in the remaining days of 1Q," Erickson said.

KeyBanc also lowered its full-year Model 3 unit and gross margin ramp estimate from 108,0000 units to 98,500 units and from 14.5 percent to 11.7 percent, respectively, and lowered EPS and 2018 revenue estimates accordingly.

One of Tesla’s biggest catalysts is the perceived quality of its products, something on which Tesla might have taken a slight hit, according to salespeople Erickson spoke with.

"We found numerous responses throughout our checks suggesting Model 3 cars are being delivered to sales centers with slight blemishes of fit and finish," the analyst said. "Salespeople are reporting that service centers are handling these fixes, but the frequency of the feedback was worth noting."

KeyBanc's findings pose incremental risk to Tesla's story and stock, since the demand for the vehicles rests on positive views of Tesla's brand and its perceived quality, Erickson said.

“We contend that a significant portion of the Model 3 backlog consists of customers looking for eventual self-driving capability and superior engineering and safety, little of which a rational buyer would perceive as existing of yet,” Erickson said.

While Keybanc does not offer an explicit price target on Tesla shares, the firm sees a fair value of $300.