The Ratings Game: These analysts have downshifted Tesla, but say long-term prospects intact

Investors were dialing down some of their loftier hopes for Tesla Inc. stock this week, but held on to the belief that at least some long-term prospects for the Silicon Valley car maker remain intact.

Analyst Bill Selesky at Argus Research cut his rating on Tesla TSLA, +7.65% shares to hold from buy on expectations of lower deliveries, Tesla’s proxy for sales, amid the novel coronavirus pandemic and the shuttering of two of the company’s factories.

“Prior to the outbreak, we had expected fairly robust deliveries from Tesla in 2020, as consumers continued to flock to the Model S, Model X, and more recently, the Model 3,” Selesky said in a note Tuesday.

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“We still think that Tesla has strong long-term prospects. However, in the near term, we believe that consumers will focus on basic concerns (food, safety, employment, etc.) and expect consumer confidence and spending to take a major hit as consumers defer large discretionary purchases.”

Argus’s 2020 delivery forecast for Tesla is now 409,000 vehicles, down 19% from its original forecast, he said. Tesla has vowed to deliver half a million vehicles in 2020.

At Citi, analyst Itay Michaeli lowered his price target on Tesla to $246 from $312, saying they expect 2020 deliveries around 434,000, down from Citi’s previous expectation of 517,000. He kept his buy rating on the stock.

The updated sales expectations reflect “a significant (~2 month) disruption at Fremont, a gradual recovery in Q3 and a full recovery in Q4” for Tesla, he said. Michaeli expects Tesla to post an adjusted loss in the first and second quarters, recovering to just above break-even in the third quarter and returning to profitability in the fourth quarter.

Tesla’s balance sheet is likely to withstand “a highly disruptive Q2,” but the risk of an extended shutdown at Fremont could put significant pressure on the balance sheet, he wrote in a note.

In terms of liquidity, Tesla’s recent $2.3 billion capital raise “added an important cushion to absorb our modeled shutdown in Q2, when Tesla is likely to face operating losses and a working capital drain,” Michaeli said.

He expects Tesla’s cash balance to decline to $5.3 billion by the end of the second quarter. “This suggests adequate cushion to absorb a difficult Q2, but relatively limited cushion to absorb similar conditions for another two quarters,” he said.

Analysts at UBS upgraded Tesla shares to neutral from sell on Tuesday “on relatively high demand visibility and its sustained tech leadership – the flip side is the net debt position that could raise concerns in a downside scenario.”

Tesla has the “best visibility” on near-term demand thanks to a backlog for the Model Y compact SUV and the localized demand for the Model 3 in China, even as sales volumes are likely to suffer from the current crisis, the UBS analysts said.

“We reiterate our view that Tesla should be able to defend its technology leadership in EV powertrain, connectivity and autonomy and rapidly gain market share. Also, we think demand for Tesla’s products is not at risk with oil at $30/bbl because its products are already on sticker price parity vs. equivalent premium cars (and superior in cost of ownership),” they said.

The UBS analysts also downgrade Ford Motor Co. F, +12.53% shares to neutral from buy, saying they prefer General Motors Co. GM, +2.94% “on better underlying earnings & FCF power.”

Tesla said last week it was starting “an orderly shutdown” of its factories in Fremont, Calif., located in a county with a shelter-in-place order, and its PV factory in Buffalo, N.Y.

The halt at the Fremont factory was to take effect at the end of the day Monday, with some basic operations continuing. The New York plant would also retain some production of parts and supplies. Operations at the Tesla “gigafactory” outside Reno, Nev., and at Tesla’s service centers and Supercharging network have continued.

GM, Ford and Fiat Chrysler Automobiles NV FCAU, +1.78% announced similar North American productions halts last week after reaching agreements with the UAW. Tesla’s workforce is not unionized.

GM and Ford confirmed last week they were exploring the idea of making additional ventilators, needed in some acute cases of COVID-19, amid fears the lifesaving devices might become scarce in the U.S. as the pandemic continues. The auto makers are also embarking on efforts to make masks for first responders and health workers. Tesla Chief Executive Elon Musk tweeted he had been in conversations with a ventilator maker.

Shares of Tesla have gained 104% in the past 12 months, contrasting with losses of 13% and 18% for the S&P 500 index SPX, +0.92% and the Dow Jones Industrial Average. DJIA, +2.67%