Will Tesla (TSLA) Cash Burn Be as Rough as Wall Street Anticipates? Baird Sets Q1 Expectations

Baird's Ben Kallo looks at tonight's forthcoming first quarter print with cautious optimism for a company whose margins should get better as the year progresses.


Can Tesla Inc (NASDAQ:TSLA) rise above first quarter expectations this evening? ┬áBaird analyst Ben Kallo may be bullish in his recommendation on Tesla, but even this bull is “cautiously optimistic” approaching this evening’s earnings show. Yet, as far as Kallo is concerned, Wall Street’s estimates are aggressively bearish- leaving room for Tesla to potentially bring in a beat despite prospective margin weakness and capital challenges. Meanwhile, Kallo anticipates cash burn may not be as bad as the Street fears, and cash generation is primed to take a step forward in the back half of the year as the Model 3 production ramps.

As such, the analyst reiterates an Outperform rating on TSLA with a $411 price target, which implies a 37% upside from current levels. (To watch Kallo’s track record, click here)

Kallo writes, “While a possible sequentially larger capital drawdown and potentially weak margins could create headline risk, we think TSLA may be able to exceed overly negative expectations. We would be buyers after the dust settles, and recommend shorts cover ahead of the report, which we believe could remove an overhang on the stock. We expect margins will show sequential improvement throughout 2018, and think cash generation will improve in 2H:18 as TSLA ramps production.”

For the first quarter, Kallo is scaling down his expectations to mirror Tesla’s actual deliveries for the quarter as well as reducing expected margins on back of the Model 3’s lesser absorption. In preview of tonight’s print, the analyst now calls for $3.3 billion, aligning with the Street’s $3.3 billion estimate, a gross margin of 14.0%, a bit ahead of the Street’s 13.0% estimate, and EPS of ($2.64) against the Street’s ($3.44).

“TSLA appears to be increasing Model 3 production as Elon recently indicated the company achieved three consecutive weeks of producing >2k Model 3s, and based on several sources we believe production continues to ramp. Additionally, Elon Musk recently indicated production delays were due, in part, to excessive automation, but we believe market commentary has been overly bearish on this point,” asserts Kallo, predicting a 25% gross margin is reasonable for Tesla to achieve on the Model 3.

TipRanks indicates the electric auto empire has Wall Street torn between the bulls and the bears- and leaning toward the bears. Out of 20 analysts polled in the last 3 months, 5 rate a Buy on TSLA stock, 9 maintain a Hold, while 6 issue a Sell on the stock. With a loss potential of 2%, the stock’s consensus target price stands at $294.07.

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