The Ratings Game: Tesla shares gain and bonds rally as liquidity fears ease, but analysts still think capital raising may be needed

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Tesla Inc.’s shares fell early Wednesday before reversing that loss as analysts weighed in on first-quarter production and delivery numbers released early Tuesday that fell short of expectations.

The stock closed up 6% Tuesday, as investors seemed to focus more on the company’s statement that it would not need to raise more money this year, allaying liquidity concerns that had weighed for the past few weeks.

But J.P. Morgan analysts noted that Tesla made the same comment in early 2016 before raising several billion dollars, which it said was needed to meet its goal at the time of producing 100,000 to 200,000 Model 3s in the second half of the year.

“Our own model does not incorporate a capital raise, but our lowered estimates newly show the company with less than $1 billion at the end of the third quarter, which the company has previously defined as its minimum comfort level, suggesting to us an increased — not decreased — likelihood of a capital raise,” analysts led by Ryan Brinkman wrote in a note.

Brinkman further noted that deliveries, Tesla’s proxy for sales, were more or less unchanged from the fourth quarter, even though growth was meant to be “supercharged” by the addition of the Model 3, the company’s mass-market sedan.

Tesla TSLA, +6.00% said that deliveries reached 29,980 vehicles in the quarter, including 8,180 Model 3 sedans, 11,730 Model S luxury sedans and 10,070 Model X SUVs. Analysts polled by FactSet had expected 38,000 vehicles to be delivered in the quarter, of which 12,300 were to be Model 3 sedans.

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J.P. Morgan reiterated its underweight rating on the stock and lowered its price target to $185 from $190, or 30% below its current trading level.

RBC Capital analyst Joseph Spak reiterated his neutral rating and slashed his stock-price target to $305 from $380, saying that while Tesla provided some relief to investors by saying it will not require a debt or equity raise this year, the production miss raises longer-term concerns.

“Tesla has mostly gotten a pass on missing targets but we sense investor patience is running thinner,” Spak wrote. “So a lower bar could be good and long-term bulls and true-believers may find this level to be an attractive entry point.”

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KeyBanc analysts took a brighter view, saying the report was better than feared and consistent with its view that the stock has been oversold.

“Our bias on the shares remains positive near term on still a very low bar to meet with Model 3 production and profitability improvements,” wrote analysts led by Brad Erickson. “Longer term, we remain sector weight on the shares as we ultimately struggle with investor perceptions of the Company’s innovative superiority in the areas of manufacturing, batteries, software, AI, and competition.”

Meanwhile, Tesla’s high-yield bonds, the $1.4 billion of 5.300% notes that mature in 2025, rallied Tuesday, tightening about 50 basis points at their peak, according to trading platform MarketAxess. The notes were last quoted 28 basis points tighter on the day, or at a yield spread of 462 basis points over comparable Treasurys.

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The notes fell below 90 cents on the dollar on March 27 after Moody’s downgraded the issuer’s rating to B3 from B2, sending it further into speculative, or junk, status. Moody’s cited “the significant shortfall” in the Model 3 production rate as well as the company’s “liquidity pressures due to its large negative free cash flow and the pending maturities of convertible bonds ($230 million in November 2018 and $920 million in March 2019). The notes were last trading at 88.25 cents.

Tesla shares were up 1.2% in midmorning trade, but have fallen about 11% in the last 12 months through Tuesday, while the S&P 500 SPX, +0.71% has gained about 10% and the Dow Jones Industrial Average DJIA, +0.47% has added about 15%.