Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[Zaxxon]

However this is a positive surprise even this board hasn't seen coming so next week should be interesting for the SP.

I'm actually a little surprised that none of us (including me) saw this coming. "Hey, what does that group of countries that actually is working to meet CO2 reduction targets have in place for ZEV-like trading" seems like a natural question to ask.

 

[Cobos]

Do Norwegian and Swiss sales count toward this EU cap n trade scheme?

I don't know about Switzerland but for Norway they do. This was a big issue recently in Norway whether Norway would join that same program or not. If we didn't the real fear was that all EV sales except Tesla would dry up since for VW or Nissan they couldn't afford to loose a "EU ZEV credit" to a sale in Norway. Hence the availability of Leafs, e-Golfs, e-tron etc would be minuscule for Norway.

 

[Prunesquallor]

If there was an upfront payment from FCA for Tesla to enter the pool and commit themselves to the pool for a few years then easily so: it's a contractual obligation entered, a right traded, for immediate money and future money. Tesla cannot enter into a similar agreement with other manufacturers anymore - so Tesla performed and FCA benefited.

Any immediate money gets recognized as 100% margin and GAAP income.

Tesla could also have negotiated for larger payments more spread out. It all depends on the negotiated construct: are the hundreds of millions of euros upfront or spread out? Since Elon is a very good negotiator I'd expect both, and the payments will go up as Tesla reduces FCA's fines.

I.e. it could be a permanent per unit income in Europe for every Tesla sold...

But right now we don't know, it could be anything on a large scale of possibilities.

It would sure be interesting to know the magnitude of FCA's out-of-compliance problem and their expected progress towards getting whole. (I expect the EU targets get more stringent with time like the US MPG targets.) If it’s lucrative enough it could have distorted Tesla's European delivery strategy, and continue to do so.

 

[Artful Dodger]

And here's key figures from the FT article from 4 days ago:

Complying with regulations will knock earnings before interest by around €7.4bn across the industry, with Peugeot expected to take the biggest hit, at around 25 per cent of earnings per share, because of its high EU focus, followed by Fiat Chrysler at 20 per cent

[...]​

If the ~$8b hit to profits estimated by UBS is accurate, and FCA's share is 20% of profit reduction, that means an annual cost of $2b. That's worth quite a bit - hopefully Tesla ran the numbers like UBS did, before entering into the deal on February 25.

I read that wording a little differently, perhaps something more along these lines:

Complying with regulations will knock earnings before interest by around €7.4bn across the industry, with Fiat Chrysler's expected hit at around 20 per cent of earnings per share.​

So then, what is FCA's current EPS :

Last Quarter: 0.45 EUR
Last Year: 0.55 EUR​

Let's use 0.25 EUR as EPS for the purposes of this estimate. FCA shares outstanding is 1,550,617,563 (1.551B). Also, here is a chart of their Market Cap and SP FYI.

Est'd total earnings per quarter going forward would be approx 388M Euro. 20% of that would be 77.5M Euro, or about 87 M USD.

That's not chump change, and it's a 1st approximation for the deal with Tesla. And for an ongoing quarterly payment under that deal, or about $350M USD per year.

Cheers!

P.S. FCA's HQ is in London, UK so Brexit risks exist
P.P.S. Rumors of a Chyrsler/Dodge EV just got a boost

 

[SPadival]

Can anyone locate the actual document on the European Commission website? I have drawn a blank so far.

and he hardly wants to lose control over SpaceX

FYI. As of Nov 2016:

Mr. Musk’s trust currently owns 54% of the outstanding stock of SpaceX and has voting control of 78% of the outstanding stock of SpaceX

https://licensing.fcc.gov/myibfs/download.do?attachment_key=1158348

 

[Prunesquallor]

Don't want to jump to any conclusions, but the below link seems to suggest that this contract is just for 2019, and so that the hundreds of millions is per (this) year. That would be excellent if true (and the stock will very likely spike on Monday), but I'm going to be cautious for now. Also seems to suggest contracts are set up on a yearly basis or maybe longer if the parties agree??

Patrick McGee on Twitter

It would also be interesting to know if Tesla locked themselves in with FCA multi-year or if they are a free agent. An annual bidding war for Tesla credits?

 

[Mars ☰mperor]

Well, if the FCA deal is big, really big, then it could simply have been systematic dip-buying on the SEC pressure, which continued after the Q1 negative surprise as well?

Note that the FCA deal and one or two 'piggy bank' effects could bring Q1 profits over ~$265m, for S&P 500 inclusion. That would create sustained buying pressure too. But we need to see more details about the FCA deal and how much of that cash is recognized in Q1 to be able to estimate S&P 500 inclusion probabilities. Too many discretionary wildcards...

If Elon really wanted to screw the shorts they could perhaps bring Q1 GAAP profits above $265m and trigger mandatory passive index fund buying in the 5-10 million shares range, which is on the level of the Tencent or the Saudi PIF investment rally.

Also, even with Q1 results TSLA fair value is robustly above $400 based on pretty much every financial multiple. If a big fish decided to buy dips up to $350 then $290 or $260 are both good deals.

Note that in Q1 P&D report Tesla only said income would be “negatively impacted” instead of plain simple “negative”, which still leaves room for a positive result.

Looking back, it just got more interesting.

“Because of the lower than expected delivery volumes and several pricing adjustments, we expect Q1 net income to be negatively impacted.”

 

[Antares Nebula]

I read that wording a little differently, perhaps something more along these lines:

Complying with regulations will knock earnings before interest by around €7.4bn across the industry, with Fiat Chrysler's expected hit at around 20 per cent of earnings per share.​

So then, what is FCA's current EPS :

Last Quarter: 0.45 EUR
Last Year: 0.55 EUR​

Let's use 0.25 EUR as EPS for the purposes of this estimate. FCA shares outstanding is 1,550,617,563 (1.551B). Also, here is a chart of their Market Cap and SP FYI.

Est'd total earnings per quarter going forward would be approx 388M Euro. 20% of that would be 77.5M Euro, or about 87 M USD.

That's not chump change, and it's a 1st approximation for the deal with Tesla. And for an ongoing quarterly payment under that deal, or about $350M USD per year.

Cheers!

P.S. FCA's HQ is in London, UK so Brexit risks exist
P.P.S. Rumors of a Chyrsler/Dodge EV just got a boost

Appreciate the number crunching. But would Fiat necessarily pay the entire 20% that they were going to pay the govt to Tesla instead? I would think that it would be some fraction of that? Maybe 10-15%? I don't know, I may not be understanding this correctly.

If it's only a 100M per year, I don't really see the shares doing much. Need about 200-300M at least. And recurring for 2-3 years at least.

 

[Prunesquallor]

Appreciate the number crunching. But would Fiat necessarily pay the entire 20% that they were going to pay the govt to Tesla instead? I would think that it would be some fraction of that? Maybe 10-15%? I don't know, I may not be understanding this correctly.

Yeah, there would have to be an incentive for FCA to fork over cash to an EV competitor rather than the EU.

 

[Artful Dodger]

Don't want to jump to any conclusions, but the below link seems to suggest that this contract is just for 2019, and so that the hundreds of millions is per (this) year. That would be excellent if true (and the stock will very likely spike on Monday), but I'm going to be cautious for now. Also seems to suggest contracts are set up on a yearly basis or maybe longer if the parties agree??

Patrick McGee on Twitter

Based on the attached EU chart from the tweet, it looks like FCA is also partnering with Tesla in the US, possibly for CARB ZEV credits. There's another large pile of cash right there, since it includes Dodge brand minivans.

 

[Fact Checking]

Based on the attached EU chart from the tweet, it looks like FCA is also partnering with Tesla in the US, possibly for CARB ZEV credits. They're another large pile of cash right there, since it includes Dodge brand (minivans).

View attachment 394577

I'm wondering, what's the duration of these pools? Just 2019 sounds too short if the fines start in 2021?

 

[JBRR]

Patrick McGee on Twitter

"Worth knowing Tesla already does this in US with ZEVs, which brings in triple digit million amounts. Also, with FCA on track to hit €2bn in penalties in 2021, you get a sense of what'd they pay to avoid. Third, several people confirmed figure, can't say who. Timing is private."

FT journalist tweet.

 

[Artful Dodger]

Appreciate the number crunching. But would Fiat necessarily pay the entire 20% that they were going to pay the govt to Tesla instead? I would think that it would be some fraction of that? Maybe 10-15%? I don't know, I may not be understanding this correctly.

If it's only a 100M per year, I don't really see the shares doing much. Need about 200-300M at least. And recurring for 2-3 years at least.

Yes, I agree the 20% is a ceiling, but why would Tesla accept less? The regulatory regime in question runs only 2 years to 2021, and it's doubtful FCA could develop their own EV tech in that time frame.

Going, forward, FCA may wish to partner with Tesla for more than just emissions pooling (cf Deliver Van rumors). The EU C02 standards are a moving target. And Tesla might have other offers.

Security and reduction of risk are worth the extra premium, since FCA is so late to the game.

 

[aubreymcfato]

Upon reflection, I have mixed feelings about this.
As a EU citizen, I'd prefer a fine of 2B to FCA: those money could be then implemented elsewhere in services or climate change action. One could say that FCA avoided the fine and those "public profits" have now been "privatized" by Tesla.
As a TSLA investor, of course this is very nice and I hope they get *a lot* of money.

At the end of the day, I think this is good. If Tesla gets money now ro reinvest *and* enable FCA to work on EVs, long-term it's good news for everyone. I'm very curious on how this news will be received in Europe.
I'll keep you posted about Italy's media reaction.

 

[Artful Dodger]

I'm wondering, what's the duration of these pools? Just 2019 sounds too short if the fines start in 2021?

Again my reading (with no actual knowledge of the EU policy) is that the 2021 figure is the estimated escalating cost. Ie: they're a few g/km over the current 120 g/km standard, and unless they get there emissions under control, they'll be seriously over the 90g/km std due to take effect by 2021.

Perhaps some of our European members can provide more color on EU emissions regs.
Paging @avoigt @hobbes @lklundin

Cheers!

 

[NicoV]

Upon reflection, I have mixed feelings about this.
As a EU citizen, I'd prefer a fine of 2B to FCA: those money could be then implemented elsewhere in services or climate change action. One could say that FCA avoided the fine and those "public profits" have now been "privatized" by Tesla.
As a TSLA investor, of course this is very nice and I hope they get *a lot* of money.

At the end of the day, I think this is good. If Tesla gets money now ro reinvest *and* enable FCA to work on EVs, long-term it's good news for everyone. I'm very curious on how this news will be received in Europe.
I'll keep you posted about Italy's media reaction.

I’m pretty sure Tesla will achieve more good things than the EU with that money. So I’m fine with this, and happy as a Tesla investor.

 

[Fact Checking]

Yes, I agree the 20% is a ceiling, but why would Tesla accept less? The regulatory regime in question runs only 2 years to 2021, and it's doubtful FCA could develop their own EV tech in that time frame.

Going, forward, FCA may wish to partner with Tesla for more than just emissions pooling (cf Deliver Van rumors). The EU C02 standards are a moving target. And Tesla might have other offers.

Security and reduction of risk are worth the extra premium, since FCA is so late to the game.

So basically Tesla can lower FCA's fine arbitrarily low all the way to zero, if FCA agrees to pay it to Tesla.

So both parties benefit from making a deal, and both parties need to cooperate to make a deal. I think Tesla would have a fair expectation of at least 50% of the fines - more if they were the sole (monopoly) source of zero emissions, which Tesla is.

If Tesla played this smart they'd have auctioned it off to all European carmakers, starting bid at $300m and eliminating the lowest bidder in every round, or something like that. Note that every carmaker would know their own exposure and bid accordingly, without having to disclose it to competitors or Tesla.

Since the pool is exclusive and non-transferrable the bidders would be in a classic Prisoners Dilemma, highest bidder wins it all.

Wouldn't be surprised if the second to last bidder was PSA ...

BTW., wouldn't be surprised if editors of the Financial Times (owned by FCA owners) would be told to ... not emit as much FUD against Tesla, because now it's in the best interest of FCA as well for Tesla to sell as many zero emissions vehicles in 2019 as possible.

Also note where the news broke first: the Financial Times ...

 

[Artful Dodger]

those money could be then implemented elsewhere in services or climate change action

I GUARANTEE that NOBODY will take more climate action with that money than Tesla.

 

[Prunesquallor]

Upon reflection, I have mixed feelings about this.
As a EU citizen, I'd prefer a fine of 2B to FCA: those money could be then implemented elsewhere in services or climate change action. One could say that FCA avoided the fine and those "public profits" have now been "privatized" by Tesla.
As a TSLA investor, of course this is very nice and I hope they get *a lot* of money.

At the end of the day, I think this is good. If Tesla gets money now ro reinvest *and* enable FCA to work on EVs, long-term it's good news for everyone. I'm very curious on how this news will be received in Europe.
I'll keep you posted about Italy's media reaction.

In my mind it would depend on FCA's plans and execution going forward. If they look at this as a way of avoiding part of the EU fine on a continuing basis and continue to build and sell their CO2 production machines, then no, they should be allowed to go broke. If this is a one-time lifeline and they have serious intent to get into compliance, than sure, Tesla will be happy to take their money to buy them more time.

 

[generalenthu]

I did some extra research. I was wondering how rights issues which are less than 1-for-1 deal with the problem of "We issued the right to buy 1 share for every 50 shares you already owned, but you only owned 20 shares". Apparently a common way is to offer a "step up privilege", which allows a shareholder to round UP... so the 20-share holder would get to buy one whole share at the discount price.

www.iflr.com/pdfs/web-seminars/rights-offerings/full-presentation.pdf
I also found that nontransferrable rights (can't sever them from the stock and sell them) have been more common than transferrable rights for a while. It's probably also possible to make transferrable rights where the step-up right isn't transferrable (i.e. you only get step-up-rights if you buy yourself... not clear on this but it looks likely it's possible). Transferrable rights help compensate stockholders who can't afford to put in more money. Transferrable rights often must be registered with the SEC and often must be listed on the stock exchange. Subscription rights which are non-transferrable need not be.

If you want to avoid Wall Street, you'd avoid making insured (underwritten) rights offerings; underwritten offerings are for "we really definitely need this much money", as opposed to "we could definitely use some more money but we'd be OK without it".

Since rights are proportional, Mr. Musk would have to put in a whole bunch of extra money if he exercised his rights! He'd have to check his personal margin balances.

Yet to catch-up with the thread, but offering rights would have the effect of pulling in the shares that are lent out. Otherwise, lent shares won't get the right. This can feed on itself and can create a squeeze, which would make the right even more valuable.

I like it. Let's do this.