Goldman Sachs Cuts Tesla (TSLA) to Neutral on FCF Concerns from Capital Deployment

October 6, 2016 6:35 AM EDT
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(Updated - October 6, 2016 8:40 AM EDT)

Goldman Sachs downgraded Tesla Motors (NASDAQ: TSLA) from Buy to Neutral with a price target of $185.00 (from $240.00). Analyst David Tamberrino said he sees incremental risk to the business related to FCF concerns from capital deployment for M&A. He also thinks any delay in the company’s timeline to launch its new Model 3 will be detrimental to shares.

"We see room for downward estimate revision as volume ramps slower and spending grows quicker," said Tamberrino. "While our 2016E EPS is ahead of the Street (-$0.59 vs. Street at -$0.93), our 2017 through 2019 EPS estimates are an average 48% below consensus. This is the result of our expectation of a slower ramp to the Model 3 launch and incremental SG&A spend as the company continues its heavy investment period, as well as from increasing R&D associated with the Model 3 and new products."

Discussing cash flow and leverage, the analyst said, "We believe the proposed combination of Tesla and SolarCity – two high growth, high cash burn businesses, creates a higher risk entity given the combined ongoing capital needs and higher net leverage that would potentially result. Our illustrative pro-forma analysis implies 2017E and 2018E FCF burn ranges of $2.4bn to $2.5bn and $1.3bn to $1.4bn with net leverage increasing to ranges of 6.6x to 6.9x and 3.5x to 3.6x, respectively, vs. legacy Tesla net leverage of 1.1x and 0.9x."

Discussing why he isn't negative on shares, the analyst said, "In the near-term we do see Tesla achieving a positive EPS result in 3Q16, mainly on strength of vehicle deliveries achieving half of the company’s 2H16 guidance. This puts our updated 3Q16 EPS estimate of $0.28 above consensus of $0.07. Additionally, we raise our estimates to fully incorporate the Tesla Energy business – driving a net positive increase to our 2016 through 2019 EPS estimates."

For an analyst ratings summary and ratings history on Tesla Motors click here. For more ratings news on Tesla Motors click here.

Shares of Tesla Motors closed at $208.46 yesterday.

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