Morgan Stanley's Recipe For Strong Q4 Guidance From Tesla

Tesla Inc. TSLA is set to report third-quarter earnings data in early November after a whirlwind of a quarter that included a chain of events that began Aug. 7 with CEO Elon Musk’s “funding secured” tweet and ended with a Securities and Exchange Commission settlement. 

The Analyst

Morgan Stanley analyst Adam Jonas maintained an Equal-weight rating on Tesla with a $291 price target.

The Thesis

Condtions support strong fourth-quarter profit and cash flow guidance from Tesla, and this information should be conveyed in next month’s results, Jonas said in a note. (See his track record here.) 

The analyst named eight factors in how he's viewing the automaker's upcoming report: 

• Model 3 volume is high and tilted toward the top-of-the-line mix. 
• Incremental margins could top 50 percent due to the production of dual-motor option packages.
• Working capital terms could drive a cash flow surprise.
• The number of Tesla vehicles on the road is expected to increase by 50 percent. “We estimate at the end of June 2018 there were roughly 250,000 Tesla units in the U.S. car park. In Q3, we estimate the additional Tesla units added to U.S. roads increased by more than 60,000 (24 percent). In Q4, we estimate another 75,000 units to be added.”
• Zero-emission vehicle credits continue to be the wild card.
• China volume and service bottlenecks represent the largest downside to fourth-quarter projections, Jonas said. 
• “Tesla continues to face significant bottlenecks that, although management has suggested they are being alleviated, could become gating factors on volume and profitability. We also note we have longer-term concerns about issues including service bandwidth and the potential for rising warranty costs impacting margins.”
• Tesla could potentially leverage its financial momentum to seek new financing, the analyst said, adding that Morgan Stanley continues to expect a $2.5-billion capital raise in Q4. The pace of the company's cash flow may not be sustainable into 2019, Jonas said. 

Price Action

Tesla shares were down 1.48 percent at $260 at the close Friday. 

Related Links:

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Tesla Analysts Weigh In On Musk's SEC Lawsuit

Photo courtesy of Tesla.