Tesla (NASDAQ: TSLA) performed well throughout 2021, and the Q3 results have instilled even more confidence in investors. Despite global logistical challenges and a shortage of semiconductors, Tesla has done a much better job in manufacturing and delivering cars than any other player in the industry. In addition, the “higher capacity ramp and sustained demand” deserved an increase in price target to $950 from $850, FY'21 Adj EPS by +9% to $5.59, and FY'22 Adj EPS by +8% to $8.05 from Jefferies.

In a note to investors on Friday, the managing director at Jefferies Philippe Houchois made several key takeaways, highlighting that OEMs are lagging far behind Tesla.

"We raise EBIT estimates 7-9% for 2022-23 and PT to $950 on higher capacity ramp and sustained demand, following further analysis of Q3 data and various sources of information on the soon-to-be launched Berlin facility. For some time the narrative has been legacy OEMs closing the gap; we see little evidence as Tesla continues to challenge at multiple levels. We raise EBIT and margin estimates in contrast with doubts about earnings momentum across legacy OEMs."

Capacity ramp and demand
Jefferies made minor changes to the deliveries estimate for 2021 to 910k, calculating a production exit run-rate of 1.1m, and raised 2022-23 volume to 1.3-1.7m units. Modeling a linear ramp up of production at the low end of guided 5-10k units/week for two similarly sized new facilities in Austin and Berlin, Tesla is set to add at least 500k units of actual capacity in one year to 1.6 million and a solid 200-250k of actual units in 2022, wrote Houchois. The final details of Q3 also showed China domestic sales of 73.6k units, putting to rest concerns about domestic demand, while annualized Q3 output yielded 530k—i.e., demonstrating Shanghai is running at more than full capacity.

Simplicity and flow
From the information Jefferies was able to gather about the new plant in Berlin, they noted that plant design was heavily flow-driven while the aluminum casting of both front and rear underbodies may reduce by close to 40% the number of body-in-white components and robots required for welding and assembly. In a global auto industry plagued by complexity, Tesla continues to reduce complexity and set new standards for simplicity of design and assembly.

Semi-conductor sourcing
The firm notes that Tesla is not immune to chip supply disruptions during 2021, but the company has vastly surpassed its competitors in sourcing them. From discussions with a senior expert in semi-conductor sourcing and manufacturing, Jefferies understands this partly reflects Tesla's in-sourcing chip design with an ability to effect rapid re-design and secure more direct sourcing than peers.

Raising estimates
Jefferies increases 2022-23 estimates close to 6% at revenue level on higher auto deliveries and GAAP EBIT 9-7%, taking 2022 margin above 10% (10.5%) excl ZEV of $750m (raised on expectations of US SAAR recovery in 2022 with still limited domestic EV supply from competitors). The firm's estimates include some modest support to margin from software subscriptions including FSD, which may accelerate in 2022. The firm raises FCF 7-4% including support from WC inflow on accelerated growth.

Q3 results after US hours on October 20
The firm forecasts Auto/Group revenue $12.5/14.5bn on unit ASP $49k, with auto gross margin 26.1% (ex-ZEV), ZEV income $250m, yielding GAAP EBIT at $1.6bn, 11.2% margin, before some negative Bitcoin mark-to-market of (est $75m), EPS $1.11/1.47 (GAAP/non GAAP), and FCF $1.4bn with support from working capital given intra-Q production seasonality.

© 2021, Eva Fox | Tesmanian. All rights reserved.

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