S&P Upgraded Tesla to 'BBB' from 'BB+' on Improving Production & Solid Cash Flow Prospects

S&P Upgraded Tesla to 'BBB' from 'BB+' on Improving Production & Solid Cash Flow Prospects

S&P Global upgraded Tesla to 'BBB' from 'BB+'. Tesla's production and deliveries since the beginning of the year have indicated solid expansion efforts to support strong demand for its products amid continued supply disruptions.

Rating Action Overview

Tesla's production and deliveries reports for the nine months ended September 30, 2022, beat S&P Global's expectations, and the company's global capacity expansion is on track to meet strong demand for its products in 2023.
S&P now views Tesla's credit profile more favorably as the company continues to lead the electric vehicle (EV) market with strong manufacturing efficiencies that support strong EBITDA margins and solid positive free operating cash flow (FOCF) above S&P's previously set growth triggers.
The index has increased its ratings on Tesla, including issuer credit rating and issue-level ratings, to 'BBB' from 'BB+'.
The stable outlook reflects S&P's expectation that Tesla will maintain low debt levels as it sustains its solid market share, profitability, and strong liquidity amid a weakening economy and an increasingly competitive environment for EVs.

Rating Action Rationale

Tesla's year-to-date (ended Sept. 30, 2022) production and deliveries indicate solid execution on capacity expansion to support strong demand for its products amid ongoing supply disruptions. In Q3, Tesla produced more than 365,000 vehicles, bringing its year-to-date level to almost 930,000 vehicles, up nearly 50% from last year. This happened despite the suspension of production in China in Q2, component shortages, parts of inflation, and disruption to logistics. As a result, the index now expects Tesla to sell 2 million units in 2023 (above their previous upgrade trigger of 1.5 million units). In S&P's opinion, this will help maintain a solid market share of electric vehicles against the backdrop of increased competition. Both the rate of production growth and the level of production efficiency at the Austin and Berlin facilities exceeded S&P's previous expectations. This gives Tesla a good opportunity to ramp up production of its future products, including the Cybertruck.

S&P's improved view of Tesla's business supports its prospects for solid and sustainable free cash flow over the next few years. The index explained that: “in 2022 and 2023, we expect Tesla to sustain FOCF to sales of over 10%, compared with our prior upside trigger of 2%, backed by industry-leading EBITDA margins of roughly 20%, compared with our upside trigger of 18% and well above our 10% threshold for above average margins for automakers. has partially offset the effects of the disruption with higher average selling prices, sale of regulatory credits (which accounted for roughly 13% of Tesla's EBITDA in the first half of 2022), and lower manufacturing costs compared with our prior expectations. in its manufacturing processes, including large castings, enabled Tesla to reduce body-welding robot count by 70% per unit of capacity in its new factories compared to its first iteration of the Model 3 body shop. 2022, key drivers for sustaining its high EBITDA margins include further innovations to reduce the cost of manufacturing and operations, securing long-term battery component supply (especially lithium), and the acceleration of software-related profits.”

Solid technological capabilities and an expanded range of affordable products will be critical as the global economy weakens and EV competition intensifies. According to the index, to enhance its competitive position, Tesla will need to expand its range of products to contend with a substantially higher number of models from established global automakers and start-ups by the end of 2025.

Tesla's strong liquidity and S&P expectation for a conservative financial policy add cushion to the 'BBB' rating. “With over $18.3 billion in cash and cash equivalents at June 30, 2022, and our expectation of solid cash flow at least through 2023, we believe Tesla will maintain its strong liquidity. These levels are well above our established threshold (auto cash balances of roughly 15% of sales) for Ford Motor Co. and General Motors Co., two peers that contend with industry cyclicality. With more cash on its balance sheet than total debt, Tesla appears easily able to fund its global expansion while navigating industry supply chain and logistics-related bottlenecks that will persist into 2023.”


The stable outlook reflects S&P's expectation that Tesla will maintain low debt levels as it sustains its solid market share, profitability, and strong liquidity amid an increasingly competitive environment for EVs.

© 2022, Eva Fox | Tesmanian. All rights reserved.


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This article is for informational purposes only. You should not construe any such information or other material as an investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Eva Fox, Tesmanian, or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Eva Fox holds zero shares of Tesla, Inc., and currently (at the time of this article's publishing) holds zero options or securities in Tesla Inc. and/or its affiliates.

About the Author

Eva Fox

Eva Fox

Eva Fox joined Tesmanian in 2019 to cover breaking news as an automotive journalist. The main topics that she covers are clean energy and electric vehicles. As a journalist, Eva is specialized in Tesla and topics related to the work and development of the company.

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