Long-Term Fundamentals of Tesla Motors (TSLA)

[GenIIIBuyer]

what and when are the chances that TSLA will be added to the S&P500?

I think the S&P 500 will be very late to the party. They require GAAP profits for 1 calendar year before adding to index. Which will probably be just prior to Model 3 launch..

 

[adiggs]

I think the S&P 500 will be very late to the party. They require GAAP profits for 1 calendar year before adding to index. Which will probably be just prior to Model 3 launch..

I didn't know about the GAAP profits requirement for S&P 500 inclusion. Requiring a minimum of 1 year of GAAP profits - I could see Gen 3 being out for awhile before that happens. The scale of the build in front of Tesla, and the scale of the opportunity - I can easily see Tesla running right around break even for a long, LONG, time to come. (Gen 3, pickup truck, actual demand generation in the US, sales and service centers around the world, Superchargers around the world, GF #2, 3, 4, ...).

This investor hopes that's what we see happen too (foot on the floor, and hold it there for years!)

 

[Auzie]

I didn't know about the GAAP profits requirement for S&P 500 inclusion. Requiring a minimum of 1 year of GAAP profits - I could see Gen 3 being out for awhile before that happens. The scale of the build in front of Tesla, and the scale of the opportunity - I can easily see Tesla running right around break even for a long, LONG, time to come. (Gen 3, pickup truck, actual demand generation in the US, sales and service centers around the world, Superchargers around the world, GF #2, 3, 4, ...).

This investor hopes that's what we see happen too (foot on the floor, and hold it there for years!)

It makes a lot of business sense for Tesla to be spending now, as much as they can.

Tesla needs to grow and establish their world footprint whilst it has the winds of macroeconomic growth blowing into its sails.

Once these winds change direction, Tesla has to be ready and able to sail into the winds.

In other words, I agree with you, we are unlikely to see profits for at least few years. Consequently I am delaying my hope for TSLA to be included in S&P 500.

 

[AudubonB]

About S&P 500 inclusion -

Based on today's closing price, TMC's market capitalization is $32.72 billion. By my read of the S&P, that places it 137th in market cap, so 363 members have a smaller presence in the market than has Tesla.

Now market cap is not everything, but it without question is one of the fundamentally most important criteria for this list. What I haven't been able to determine is how many US companies of that market cap and larger also are not S&P members....but it cannot be more than a handful.

A partial list of S&P 500 members whose market cap is smaller than Tesla's, as of 25 August:

Eaton
Delta
Norfolk Southern
General Mills
Archer Daniels
CBS
Johnson Controls
Travelers
Deere
Wellpoint
Hess

Big names!!!!!

On edit: I haven't anything more recent than the year-end 2013 list for the FT 500 list of global securities; by that list, Tesla would rank approximately 270th.

 

[RABaby]

About S&P 500 inclusion -

Based on today's closing price, TMC's market capitalization is $32.72 billion. By my read of the S&P, that places it 137th in market cap, so 363 members have a smaller presence in the market than has Tesla.

Now market cap is not everything, but it without question is one of the fundamentally most important criteria for this list. What I haven't been able to determine is how many US companies of that market cap and larger also are not S&P members....but it cannot be more than a handful.

A partial list of S&P 500 members whose market cap is smaller than Tesla's, as of 25 August:

Eaton
Delta
Norfolk Southern
General Mills
Archer Daniels
CBS
Johnson Controls
Travelers
Deere
Wellpoint
Hess

Big names!!!!!

On edit: I haven't anything more recent than the year-end 2013 list for the FT 500 list of global securities; by that list, Tesla would rank approximately 270th.

This link is from April when TSLA had less than an 18 billion market cap and would have ranked 3rd on the list of largest companies not included in the S&P. Unless the others shot up by more, which is not likely, TSLA would now be #1 on largest not included:

Candidates to Join the SP 500 - 24/7 Wall St.

 

[AudubonB]

Some of the names in that article, RABaby, include Las Vegas Sands - now at $55.45bn; Alexion Pharm., now at $33.74bn - and still not in but bigger than Tesla; the chemicals giant LyondellBasell at $57.87bn is in that article but at time of writing already in - that article was incorrect.
It appears that low-free-floaters like GM and others don't pass the S&P Member test. Perhaps Mr. Musk's large position is one reason TSLA is not in the 500????

 

[Auzie]

Some of the names in that article, RABaby, include Las Vegas Sands - now at $55.45bn; Alexion Pharm., now at $33.74bn - and still not in but bigger than Tesla; the chemicals giant LyondellBasell at $57.87bn is in that article but at time of writing already in - that article was incorrect.
It appears that low-free-floaters like GM and others don't pass the S&P Member test. Perhaps Mr. Musk's large position is one reason TSLA is not in the 500????

I think Tesla insiders hold less than 40% of the float, condition for inclusion in the index is less than 50%.

Most likely Tesla is not part of the index yet because it does not meet one of the conditions for inclusion:Companies should have 4 consecutive quarters of positive as reported earnings, where as reported earnings are defined as gaap net income excluding discontinued operations and extraordinary items.

 

[chickensevil]

I think Tesla insiders hold less than 40% of the float, condition for inclusion in the index is less than 50%.

Most likely Tesla is not part of the index yet because it does not meet one of the conditions for inclusion:Companies should have 4 consecutive quarters of positive as reported earnings, where as reported earnings are defined as gaap net income excluding discontinued operations and extraordinary items.

Yeah, I believe this has been brought up before and the consensus was that it would not happen until we get GAAP positive. I heard rumors about them possibly changing the GAAP accounting rules regarding lease accounting which would actually help Tesla's reporting in that their "Guaranteed Resale Value" isn't technically a lease. But I have no clue how true that is. In any case, given how much money Tesla is likely to be spending, we have been fortunate to have a non-GAAP profit, IMO.

 

[Curt Renz]

Below are pertinent excerpts from S&P’s index inclusion guidelines for 2000 and 2014:

General Criteria for
S&P U.S. Index
Membership
September, 2000

INTRODUCTION
One of the most frequent questions we get at Standard & Poor’s is, “What are the criteria
for being added to an S&P Index?” First and foremost, S&P Indices are not rules-based; all
changes are fully discretionary and are determined by the Index Committee based upon public
information. Companies may not apply for inclusion…

FUNDAMENTAL ANALYSIS
The profitability criteria are four quarters of positive net income on an operating basis.
Sometimes, Standard & Poor’s will include a company that would be profitable except for a
loss due to a merger or acquisition…

CONCLUSION
These are the main five criteria used by the S&P Index Committee to identify Index
candidates. Please keep in mind that a company meeting all of these criteria is not assured of
being added to an S&P Index. Likewise, the fact that a company might not meet all of the
above requirements does not mean that it cannot be added to an Index...


S&P U.S. Industries
Methodology
July 2014

Financial Viability. The sum of the most recent four consecutive quarters’ as-reported
earnings should be positive as should the most recent quarter. As-reported earnings are
Generally Accepted Accounting Principles (GAAP) net income excluding discontinued
operations and extraordinary items…

Index Committee

...In addition, the Index Committee may revise index policy covering rules for selecting companies,
treatment of dividends, share counts or other matters...

 

[AlMc]

Below are pertinent excerpts from S&P’s index inclusion guidelines for 2000 and 2014:

General Criteria for
S&P U.S. Index
Membership
September, 2000

INTRODUCTION
One of the most frequent questions we get at Standard & Poor’s is, “What are the criteria
for being added to an S&P Index?” First and foremost, S&P Indices are not rules-based; all
changes are fully discretionary and are determined by the Index Committee based upon public
information. Companies may not apply for inclusion…

FUNDAMENTAL ANALYSIS
The profitability criteria are four quarters of positive net income on an operating basis.
Sometimes, Standard & Poor’s will include a company that would be profitable except for a
loss due to a merger or acquisition…

CONCLUSION
These are the main five criteria used by the S&P Index Committee to identify Index
candidates. Please keep in mind that a company meeting all of these criteria is not assured of
being added to an S&P Index. Likewise, the fact that a company might not meet all of the
above requirements does not mean that it cannot be added to an Index


S&P U.S. Industries
Methodology
July 2014

Financial Viability. The sum of the most recent four consecutive quarters’ as-reported
earnings should be positive as should the most recent quarter. As-reported earnings are
Generally Accepted Accounting Principles (GAAP) net income excluding discontinued
operations and extraordinary items…

Index Committee

...In addition, the Index Committee may revise index policy covering rules for selecting companies,
treatment of dividends, share counts or other matters.

Based on your expertise Curt, do you see the S&P adding TM to their index before 4 consecutive GAAP + quarters?

 

[Curt Renz]

Based on your expertise Curt, do you see the S&P adding TM to their index before 4 consecutive GAAP + quarters?

The 2000 guidelines appear to be more lenient than those implemented last month. It really depends on the committee members. How much weight do they want to give to market capitalization? How much allowance will be given to what appears to be a successful growth company that is pouring revenue into R&D and expansion?

I have a friend who is a senior executive at S&P. I asked him whether the index committee would consider Tesla Motors. He answered that there is a wall preventing discussion between his research department and the committee, so he can’t comment. I don’t know any of the committee members, so your guess is as good as mine.

 

[ckessel]

What's the goal of the S&P 500 exactly? If it's meant to be a proxy metric for overall economic business health, then any high growth company in the early stages wouldn't be a good fit for that goal. I'm just throwing out a discussion point, as I have no idea what S&P's goal is.

I supposed asked another way, is there a reason that we would want TSLA added to the S&P?

 

[EldestOyster]

I was just about to ask the same question! All I can add is, does S&P have any kind of mission statement wherein they tell us what they're trying to achieve with this?

 

[Curt Renz]

...does S&P have any kind of mission statement wherein they tell us what they're trying to achieve with this?

From the introduction to the 2014 guidelines:

S&P Dow Jones U.S. indices are designed to reflect the U.S. equity markets and, through
the markets, the U.S. economy. The S&P 500 focuses on the large-cap sector of the
market; however, since it includes a significant portion of the total value of the market, it
also represents the market. Companies in the S&P 500 are considered leading companies
in leading industries...

- - - Updated - - -

...is there a reason that we would want TSLA added to the S&P?

There is normally a pop upward in share price on the announcement that a company soon will be included in the index. S&P 500 and other related ETF's would be forced to buy. Other funds requiring or preferring S&P 500 stocks may also do so. The effect usually becomes muted by the time the company is actually added to the list. In the long run such inclusion may inspire more confidence from shareholders, lenders, suppliers and customers.

 

[Auzie]

What's the goal of the S&P 500 exactly? If it's meant to be a proxy metric for overall economic business health, then any high growth company in the early stages wouldn't be a good fit for that goal. I'm just throwing out a discussion point, as I have no idea what S&P's goal is.

I supposed asked another way, is there a reason that we would want TSLA added to the S&P?

The funds that track the index would buy TSLA if it becomes part of the index. These funds have a lot of inertia when selling and buying, as their positions are much larger in comparison to individual investors. I would expect TSLA to loose a lot of its current volatility if these funds start buying in.

 

[TSLAopt]

The funds that track the index would buy TSLA if it becomes part of the index. These funds have a lot of inertia when selling and buying, as their positions are much larger in comparison to individual investors. I would expect TSLA to loose a lot of its current volatility if these funds start buying in.

Yes, I would guess we go up 5-8% the day it gets announced

 

[mershaw2001]

Yes, I would guess we go up 5-8% the day it gets announced

I don't think the upward bump on that day would be of such a significant magnitude. I think- and this is conjecture- that the index funds don't accumulate TSLA on the day of the announcement. They buy either in advance (by getting a head notice) or they buy in the following weeks. I think the pop on the day is due to the good will that the inclusion causes, but not from the actual funds buying.

 

[Curt Renz]

...They buy either in advance (by getting a head notice) or they buy in the following weeks...

No front running/insider informing. That would land the perpetrators in jail along with the payment of hefty fines. S&P is very careful about this. This is from the 2014 guidelines:

Announcements are available to the public via our Web site before or at the same time they are available to clients or the affected companies.

 

[Norse]

(I did not where to put this so Mods feel free to move this post)

I am kind of surprised to see this so soon:

London to trial wirelessly charged hybrid buses
Transport for London announces new trial to test hybrid buses capable of wirelessly charging batteries at stops
http://www.businessgreen.com/bg/news/2362064/london-to-trial-wirelessly-charged-hybrid-buses

 

[Norse]

The auto industry has begun to cannibalize old car parts for new clean tech purposes, and according to the latest news from the Energy Department it looks like old tires can be gobbled up, digested, and spit out for use in lithium-ion batteries. The new technology could help solve a looming crisis in the lithium-ion battery market as rising demand for electric vehicles threatens to squeeze the supply of critical materials, including graphite as well as lithium.

Car Eats Self, Solves Lithium-Ion Battery Crisis | CleanTechnica