Tesla is strong enough to weather several months of near shutdown of operations, analyst says

Morgan Stanley says that Tesla (TSLA) is strong enough financially to afford “several months of near shutdown of operations” at its Fremont factory, but the automaker is still moving ahead.

As we have been reporting over the last few days, there’s been a back and forth between Tesla and different levels of government about whether or not the automaker has to comply with the shelter-in-place order in the Bay Area, which would force the company to stop producing cars at its Fremont factory.

Based on an email sent to employees earlier today, Tesla appears to still plan to continue its operations at the factory, despite recent comments from the Alameda County Sheriff’s Office saying that they are not allowed to produce cars.

Now Morgan Stanley analyst Adam Jonas says that he is getting a lot of calls from investors about Tesla.

The analyst says that he and his team have been in talks with Tesla, and they believe the company’s financials are in good enough shape to get through months of near shutdown operations:

Lots of incoming on Tesla. It seems most of the conversations are from investors who felt anxiety for not owning the stock during its extraordinary recent run-up through Jan and Feb and are taking a closer look. We and our associates are having detailed conversations on Tesla’s available liquidity including the nuances of its warehouse facility, China credit line, ability to delay or fund capex, working capital, and of course, the state of play of its Fremont factory, which as of this writing was still in operation. However, the Alameda County Sheriff’s Department said that the factory was deemed a ‘non-essential business’ and may only maintain ‘minimum’ operation during the shelter-in-place order in the region. On our analysis of its liquidity and discussion with the company, as well as our stress testing, we believe Tesla is strong enough to weather several months of a near shutdown of operations, if necessary.

Nonetheless, Morgan Stanley lowered its price target on Tesla to $460 from $480 as it revises its delivery estimate amid the current crisis.

Another analyst, Pierre Ferrago at New Street, offered up a similar take as Morgan Stanley but with a more detailed look at the financial implications:

Tesla can survive 5 quarters with cash on hand if its Fremont Factory is shut-down

Committed capex: ~$2bn – we assume Tesla will continue the build-out of its Shanghai and Berlin fabs.

Working Capital charge on shutdown: Tesla incurs working capital charge first quarter following a shutdown, as it needs to pay suppliers (30-60 day payment terms). Offset partly by decreasing inventory & receivables. Net one-off impact could be $1.5bn.

Quarterly cash burn: revenues from Solar, Energy, Shanghai not fully offsetting R&D and SG&A (assuming a 1/3rd SG&A cut). Negative EBITDA of $400-450m, negative OCF of ~$600m per quarter.

Self-financing potential: after the first quarter post shut-down, Tesla has $2.9bn of available cash. At a $600m cash burn per quarter it can hence self-finance operations for 5 quarters.

Conclusion: even in an extreme scenario Tesla can self-finance operationsmultiple quarters. In such a scenario, Tesla would obviously take remedial actions (ramping Shanghai production, moving production to Nevada). Our
take on a more likely scenario (20-40% slowdown in units) here.

TSLA stock was up 12% this morning after falling 16% yesterday.

Update:

Police Chief Kimberly Petersen and members of our City Management team will meet with Tesla Factory management today to discuss cooperation for compliance with the County Health Officer’s Order. pic.twitter.com/dTBnbEdTmN

— Fremont Police Department (@FremontPD) March 19, 2020

Electrek’s Take

That’s good to know. Tesla should be fine if they have to shut down Fremont for months. Let’s keep that in mind as we consider this:

Whether or not they should keep it open has been up for debate. Elon Musk and Tesla clearly seem to think they shouldn’t have to shut down, as they consider their operations to be part of the “critical national infrastructure.”

Others think that the risk of acceleration of the transmission of the virus is not worth keeping production going.

Personally, I am in between. If Tesla should be OK either way, the risk of keeping operations going doesn’t seem to be worth the reward, which would really just be a better financial quarter.

But if Tesla has been able to operate Gigafactory Shanghai without any cases of the virus, I think they should also be able to operate Fremont safely. Let’s keep in mind China is testing everyone like crazy while there aren’t even enough tests in the US to check people with obvious symptoms. So the risk of a symptomless carrier entering the factory is much higher in the US.

So again, is it worth the risk? What do you think? Let us know in the comment section below.