Every quarter, the leadership team of almost every publicly traded companies take questions from Wall Street analysts. This is a standard part of the quarterly earnings announcement. The company usually issues a press release and then conducts a conference call that includes a presentation followed by questions and answers.
Few of these conference calls are remembered. One of the most famous calls occurred in 2001 when Enron’s top executive called a fund manager an “a**” during a conference call. It’s a Wall Street legend.
Enron President and Chief Executive Officer Jeff Skilling took a question from Richard Grubman, managing director of Highfields Capital Management in Boston. Grubman asked to see Enron’s balance sheet and was told it would not be available until it was filed with the Securities and Exchange Commission.
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On the call, Grubman said, “You’re the only financial institution that can’t come up with balance sheet or cash flow statement after earnings.”
“Well, thank you very much, we appreciate that. A**,” Skilling responded with a laugh.
Skilling later explained, “The specific fellow that I was not real happy with is a short seller in the market. I don’t think it is fair to our shareholders to give someone a platform like that they are using for some personal vested interest related to their stock position.”
“I get a little exasperated with that sort of thing, and I want people to know I am exasperated,” he said.
Grubman disputed Enron’s assertion the balance sheets and cash flow statements were not ready yet, particularly in light of Skilling’s mention during the call that Enron reconciles its credit risks and trading book daily.
“I’m sort of at a loss as to why that was such an objectionable question,” Grubman said, adding:
“He’s got some nerve. He and his management team sold 7 million shares into the market last year, so he’s plugged the market for a half a billion dollars worth of stock valued in the $70s and $80s.
“Now the stock is the high $50s-low $60s and I’m an asshole because I ask about the balance sheet?”
Less than a year later, Enron stock was worthless.
Skilling is now in prison for fraud.
Now, It’s Tesla’s Turn For Scrutiny
Nearly seventeen years later, analysts finally have another conference call to talk about. Tesla Motors Inc. (Nasdaq: TSLA) CEO Elon Musk expressed his annoyance with analysts and day traders.
According to MarketWatch, “When Bernstein analyst Toni Sacconaghi attempted to ask about capital-expenditure spending and the money needed, Musk cut him off by yelling “Next!”
When RBC Capital Markets analyst Joseph Spak then asked how many people with Model 3 reservations were actually taking delivery of their cars, Musk declined to answer any more “boring,” “dry” questions.
“You’re killing me,” he said.
But, Musk wasn’t done. He later said, “I think that if people are concerned about volatility, they should definitely not buy our stock. I’m not here to convince you to buy our stock. Do not buy it if volatility is scary.”
And, in case analysts hadn’t gotten the message, Musk added, “We have no interest in satisfying the desires of day traders, like we couldn’t care less. Please sell our stock and don’t buy it.”
Traders responded to the rant by selling the stock.
The stochastics indicator is at the bottom of the chart. Stochastics is a popular momentum tool and the chart shows that the post-conference call sell off generated a sell signal in the indicator.
Musk Might Have a Point
However, Musk specifically asked investors to focus on the long term. From a fundamental perspective, it is difficult to see how that makes TSLA more appealing to many investors.
It is possible that TSLA will become a premier car maker and that profits from its solar energy division will provide stable earnings. The company is partnering with Home Depot to expand distribution of its solar panels and battery walls.
However, lower tax rates could make the products less desirable to many customers. Electric cars and solar panels for homes have depended on tax subsidies to offset their high costs.
Tax subsidies on Tesla’s cars are being phased out and unlikely to be available much longer. Lower income tax rates included in the tax reform package reduces the value of tax breaks for many home owners and this is likely to lower the demand for solar power.
Analysts are lowering their estimates but for now, they are optimistic about the company’s earnings potential. On average, they expect a loss of nearly $7 per share this year. But, they believe TSLA could turn profitable in 2019 with earnings per share (EPS) of $1.85 and a jump to EPS of $7.57 in 2020.
Using 2020 EPS and an above average price to earnings (P/E) ratio of 30, a reasonable price target for the stock is about $227. This assumes Musk turns the company around and starts meeting production targets. And, even then, the stock is trading above that price.
Technicals Also Support the Bearish Case
From a technical perspective, Musk’s advice not to buy the stock also appears to be sound. The next chart is a weekly view. Stochastics is again at the bottom of the chart and the indicator is on a sell signal at this time frame.
The weekly chart that there was support near $300. The stock has taken out that price level and could move significantly lower before the next expected support level near $200.
Finally, the monthly chart is also showing a stochastics sell signal.
It’s unusual for all three of these time frames to be aligned so well. Often, in one of the time frames the indicator will diverge from the other two. That is not the case for TSLA where the charts are uniformly bearish and where the charts agree with the bearish fundamental outlook.
Elon Musk was simply expressing frustration. But, like Jeff Skilling before him, the frustration could indicate a growing concern about the company’s fundamentals.
When Skilling snapped, he knew that Enron was in trouble and unlikely to survive. Musk also knows that his company is in trouble. Tesla is not a fraud like Enron was. But, Tesla is burning cash, facing manufacturing problems and encountering a change in demand brought about by tax reform.
It’s likely that Elon Musk was right and now is not the time to buy Tesla.
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