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Tesla shares surge on report of a profit and improved cash flow in third quarter

Tesla shares surge on report of a profit and improved cash flow in third quarter
Tesla Chief Executive Elon Musk answered doubters by meeting his profit and cash-flow promises. (Kiichiro Sato / Associated Press)

Tesla Chief Executive Elon Musk dusted his critics and gave his company room to breathe Wednesday, meeting profit and cash-flow promises for the electric car maker and exceeding analyst expectations.

The positive report reflects booming Model 3 sales and should tone down short sellers and analysts who argued that growth can’t be sustained for at least several more months. The results also make it more possible for Tesla to raise debt or equity to provide capital needed for further growth.

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The company said it earned $311.5 million on $6.82 billion in revenue in the third quarter, delivering a quarterly profit for the third time since 2013. Free cash flow came in at a positive $881 million. Cash on hand rose to $3 billion, up $731 million from the second quarter.

Earnings were a positive $1.82 a share, well above analyst forecasts, which had ranged from a $1.75 loss to an 88-cent gain.

The results come amid rising production and sales of Tesla’s Model 3 and mean that Tesla can now make a $230-million bond payment due in early November with cash. An additional $920 million is due in March. The March debt has a stock conversion price set just over $359. If Musk can boost the stock price that high in December, bonds could be converted into stock, and Tesla would escape paying the principal.

Tesla shares rose 11% to $321 a share in after-hours trading Wednesday. They had slid 1.9% to $288.50 in regular trading.

In a conference call with analysts, Musk stressed the importance of generating sustainable profits.

“This quarter was an important step toward that,” Musk said. He repeated earlier vows that Tesla will be profitable and cash-flow positive from here on out.

Musk said he sees worldwide demand for the Model 3 eventually reaching 500,000 to 1 million cars a year. That would place the Model 3 among the top 25 models, based on 2017 sales. Only Ford's F-series pickups sold more than 1 million units that year.

Results were bolstered by a 30% reduction in labor hours required to build the Model 3, Tesla said — a sign that the company is emerging from severe manufacturing problems that Musk had called “production hell.”

Continued growth in Model 3 sales is crucial. The company racked up its first strong volume on Model 3 production in the third quarter, nearly doubling the number of cars manufactured in the previous quarter to 53,239. The 4,000-cars-a-week average is well below the forecast of 5,000 a week Musk made in December and his 7,500-a-week prediction of July 2017. Model 3 unit sales tripled in the third quarter to 55,280, according to Tesla.

“A profitable quarter is a good start, though Tesla has made this start twice before without follow-up or booking an annual profit,” said Karl Brauer, market analyst at Autotrader. “If Model 3 production, and demand, are sustained over the next three quarters Tesla could enter sustainable financial status for the first time in its 15-year existence.”

Sales in coming months will provide more answers about the company’s trajectory. Tesla skeptics say the company has almost exhausted its order backlog, while enthusiasts believe sales growth is just getting started.

Tesla is by far the world’s best-selling electric car brand, and based on third-quarter deliveries the Model 3 is now the fifth-best-selling sedan of any power train in the U.S., behind only the Toyota Corolla and Camry and the Honda Civic and Accord.

Tesla has had the electric car market nearly to itself since the Model S sedan was introduced in 2012. Competition is revving up, though, with several automakers introducing EVs in 2019 and dozens of models planned for 2020. Jaguar’s new I-Pace electric compact SUV already outsells Tesla in Norway, Tesla’s largest market outside the U.S. and China.

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Sales in China have been crimped by a 40% import tax that country levied in response to U.S. tariffs on Chinese goods. The company continues its hunt for money to construct a factory in Shanghai, which would build tariff-free cars.

Even if sales continue to grow, profit margins could get squeezed as the Model 3’s average selling price falls, although Tesla said that’s “not expected” to affect overall profits.

Last week, Tesla added another version of that car to its mix, a $46,000-base-price vehicle with a single rear-wheel motor and what Tesla calls a mid-range battery — 260 miles compared with 310 for its longer-range model. A long-promised $35,000 Model 3, with an expected 220-mile range, is not yet in production and no longer appears on Tesla’s Model 3 order page.

Tesla said about 91,000 people who placed reservations for the Model 3 — or 20% of the 455,000 reservation holders the company reported in April 2017 — have canceled their orders. Tesla didn’t say whether that number includes people who have asked for their $1,000 deposits back and not yet received them.

Many reservation holders have complained on social media and to The Times that they have not received their refunds and have had trouble getting through on Tesla customer service lines.

Third-quarter earnings were boosted by $52 million in zero-emission credit sales. The so-called ZEV credits are earned by making low- and zero-emission cars — such as Tesla’s electric vehicles — or by buying credits from automakers that have a surplus of them. Tesla’s electric car fleet creates no tailpipe emissions, so it sells its ZEV credits to auto companies that need them to meet California regulations.

The ZEV revenue contributes directly to the bottom line. Without ZEV credits, Tesla’s third-quarter earnings would have dropped to $259.3 million.

Accounts payable rose to $3.5 billion, from $1.8 billion in the previous quarter. Tesla reportedly has stretched payments to some suppliers and asked some for refunds.

Musk and Tesla have been under scrutiny from the U.S. Securities and Exchange Commission and the U.S. Justice Department. In August, Musk tweeted that he had secured funding for a deal to take Tesla private at $420 a share but later showed little evidence that a deal was ever seriously discussed.

The SEC sued Musk, who settled with the regulatory body soon after, not admitting guilt but agreeing to give up his role as Tesla chairman and to have his tweets and other communications monitored by Tesla’s board and a Tesla lawyer. He also agreed to appoint two new independent directors to the board. Musk was assessed a $20-million fine, as was Tesla, but Tesla’s cash was preserved when Musk bought $20 million in Tesla stock.

Musk has said Tesla has no need to raise new capital, but most analysts believe outside financing will be necessary to pay for the factories needed to introduce new vehicles, such as a compact crossover and a semi-truck.

Such growth is built into the company’s current stock price, they say. Capital spending in the third quarter was $510 million, less than half the same quarter last year.

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4:15 p.m.: This article has been updated with Tesla’s conference call with analysts.

3:40 p.m.: This article has been updated with additional detail from Tesla’s financial report.

2:15 p.m.: This article has been updated with per-share earnings and other data.

This article was originally published at 1:30 p.m.

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