March 27, 2018

Perspective

WSJ – Retirees Reshape Where Americans Live – Janet Adamy and Paul Overberg 3/22

WSJ – Daily Shot: Ratio of Twitter Bacon-to-Kale Mentions 3/26

Worthy Insights / Opinion Pieces / Advice

Bloomberg Gadfly – For Tesla, Cars + Cash + Credit + Convertibles = Crunch Time – Liam Denning 3/23

  • “Opinions differ on the exact nature of Tesla, ranging from struggling car manufacturer to tech pioneer to something akin to the second coming. Regardless, it is undoubtedly one thing: a money machine.”
  • “I don’t mean that in the sense of Tesla making a lot of money; more that it is a machine for the raising and consumption of money.”
  • “All companies are this to one degree or another, of course; it’s just that Tesla Inc. is more at the ‘another’ end of things. Reliably negative on free cash flow, Tesla depends on a smorgasbord of external funding, from equity raising to vehicle deposits to high-yield bonds to securitized leases to negative working capital. And that smorgasbord rests, of course, on Tesla’s famously gravity-defying stock price and faith in CEO Elon Musk.”
  • “Which is why these four charts deserve more than a glance from even the most ardent Muskovite:”

  • “We’re just over a week away from knowing whether or not Tesla has hit its (much reduced) target for producing 2,500 Model 3s per week by the end of the first quarter. The signs thus far aren’t good, which also raises doubts about the 5,000-a-week target for the end of June.”
  • “Hitting these targets matters for the Tesla money machine on three fronts.”
  • “First, reducing that risk-laden reliance on negative working capital and getting a return on the money already spent on production lines relies on producing more cars. Second, analysts currently expect Tesla to burn through $2.7 billion of cash this year — and analysts tend to be optimistic on this stuff. Third, when Moody’s rated that bond Tesla sold last August, it was assuming 300,000 Model 3 deliveries this year, which now looks far out of reach.”
  • “In other words, Tesla’s money machine will almost certainly need to raise more this year due to the Model 3’s problems — but those same problems undermine the pitch for selling more equity or debt.”
  • “This is happening against a backdrop of rising interest rates. Tesla’s debt has jumped in recent years, especially after it took on SolarCity Corp.’s obligations. Interest expense more than doubled in 2017 and reached the astounding level of one-third of gross profit in the final quarter of 2017:”
  • “At the same time, Tesla is moving closer to a maturity wall, with $3.7 billion of bonds and credit lines needing refinancing by the end of 2020.”
  • “Some $1.7 billion of that consists of three convertible bonds falling due between this coming November and the next one. Almost half of it — inherited from SolarCity — is hopelessly out of the money, with conversion prices starting at $560 (Tesla closed Thursday at $309 and change). The rest of it, a $920 million convertible due next March, sports a conversion price of just under $360; still underwater but within sight of the surface.”
  • “Converting that last one to equity would dilute Tesla’s free float by 2%. But that could be more palatable than the alternative of replacing it with a straight bond.”
  • “As of now, those three bonds pay a weighted-average coupon of just over 1%, or about $18 million a year. All else equal, assuming they were all refinanced at spreads similar to where Tesla’s 2025 bonds trade now, but factoring in the forecast increase in Treasury yields, that would jump to 7%, or $120 million. Putting that in context, Tesla’s entire interest expense last year was $471 million.”
  • “A rebound in the stock price would take much of this pain away, of course.”

Bloomberg Gadfly – Uber’s India Doom Is Written After Singapore Falls to Grab – Andy Mukherjee 3/26

Bloomberg – Airlines Are Asking the Trump Administration to Bring Back Hidden Fees – Nikki Ekstein 3/23

  • “Third-party booking platforms have made buying a plane ticket more transparent than ever. But airlines are fighting to keep data out of their hands.”

Markets / Economy

Bloomberg Businessweek – The Great Inflation Mystery – Peter Coy 3/22

Finance

WSJ – Want to Be a High-Frequency Trader? Here’s Your Chance – Alexander Osipovich 3/23

WSJ – Daily Shot: Biggest Three Banks Gobble Up $2.4 Trillion in New Deposits Since Crisis – Rachel Louise Ensign 3/22

Health / Medicine

Business Insider – What the color of your urine says about your health and hydration – Kevin Loria and Jenny Cheng 3/25

Automotive

FT – Carmakers take electric fight to the factory floor – Patrick McGee 3/18

  • “Today, established carmakers flaunt their ability to manufacture all kinds of models, from hatchbacks to sport utility vehicles, on a single production line. Their challenge is to revamp these operations to produce electric vehicles in high volumes, reinforcing barriers to entry in an industry under siege from technology companies and start-ups.”
  • “Instead of coming out with an array of unprofitable electric cars today, the incumbents are putting the bulk of resources into production facilities that will mass-produce models from 2020, once battery costs fall and economies of scale kick in. Analysts suggest this approach leaves the impression the incumbents are lagging far behind Tesla. But once the game actually starts, say experts, the carmakers will be in a strong position to dominate the market.”
  • “’None of the traditional car manufacturers will have problems scaling up electric vehicle production,’ says Klaus Stricker, co-head of the global automotive practice at Bain & Company. ‘That’s exactly what they do best’.”
  • “Yet if the stock market is any guide, investors are more skeptical. Valuations of the big carmakers are among the most depressed on the S&P 500, Germany’s DAX and Japan’s Nikkei indices, according to Bernstein. Yet Tesla is valued like its products are set to dominate the car market the way Apple conquered mobile phones.” 
  • “Tesla’s market value of $55bn is about $2.3bn more than GM’s, though for every car it built last year the latter group produced 100.”
  • “Tesla’s production troubles are a reminder that in automotive history, it is how to build cars, rather than the merits of any particular model, that is key to success. After Ford displaced craft production with mass assembly in 1908, it was overtaken by GM in the 1920s with ‘flexible mass production’ that could produce an array of models, from entry-level to luxury brands, and respond to customer preferences. In the 1980s, both companies were disrupted by Honda and Toyota’s methods of lean production. The Japanese groups outsourced a majority of tasks previously considered critical. With parts arriving ‘just in time’ on the assembly line, they largely did away with inventories.”
  • “The success of German manufacturers, whose volumes more than trebled from 4m units in 1990 to 15m last year, was largely based on ‘platform sharing’ that let multiple models use the same design underpinnings. VW Group, the world’s largest carmaker, uses common building blocks under ‘the Lego principle’ to share engines, transmissions and components across its 12 brands.”
  • “These progressive changes were all based on superior methods of producing cars, forcing rivals to adapt or die. ‘Efficiency was always the cornerstone of success in the automotive industry,’ says Oliver Zipse, head of production at BMW. ‘As soon as you were not able to produce in a particular cost frame, you were out of the market’.”

China

Bloomberg Businessweek – The New Head of China’s Money Machine Faces a Delicate Balancing Act – Enda Curran 3/19

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