By Tim Higgins
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 19, 2020).
Elon Musk's success last week restarting production at Tesla
Inc.'s lone U.S. factory ends one drama but sets up another with a
big question: Can the car maker park itself in the S&P 500?
Joining the index would bring the prestige of belonging to the
benchmark gauge of U.S. equities and drive index funds to race to
include the company's shares in their holdings.
Inclusion in the S&P 500 requires an accumulated profit over
four consecutive quarters. With Tesla's profit over its past three
quarters -- its longest run of profitability -- it may be able to
join the influential index if it can defy Wall Street's expectation
and eke out another this period.
The connection could help explain why Mr. Musk was so determined
to reopen the plant, which had been idled since March 23 by local
authorities trying to stem the spread of Covid-19, the disease
caused by the new coronavirus.
Analysts and other observers have puzzled over why Mr. Musk
pushed so aggressively to restart the Fremont, Calif., factory a
week earlier than local authorities anticipated -- including filing
a suit in federal court against the local authority that ordered
Tesla not to ramp up and daring authorities to arrest him (they
didn't). Mr. Musk has complained that competing car makers in other
states were being allowed to reopen when he wasn't.
"I don't think reopening a week or two later than the Detroit
three or transplants matters much in the long run, but it will
matter for [second-quarter] results," said David Whiston, an
analyst for Morningstar Research Services.
The local county on Monday cleared manufacturers to resume
production if Covid-19-related safety requirements are met. The
local police department that has inspected Tesla's U.S. plant said
"they were meeting or exceeding the specific safety protocols we
were asked to look at."
Mr. Musk didn't respond to a request for comment. Earlier this
month he surprised investors by saying he thought the company's
stock was too high, sending shares sharply lower only for them to
rebound in the following days. He didn't explain why he felt shares
On its face, generating a profit in the April-to-June period
might seem improbable, given Tesla's lone U.S. car plant was idled
for about half that time. Analysts surveyed by FactSet predict
Tesla will report a loss of $387 million after deliveries fall 31%
from the first quarter to 67,000.
Tesla got close to meeting the S&P 500 profit requirement
already with its first-quarter results, but it fell short of a
cumulative four-quarter profit by about $144 million, with a $16
million profit that wasn't enough to offset losses in the second
quarter a year earlier. Its most recent quarter also must be
profitable, along with other requirements, for the S&P 500 to
consider adding the company. A spokesman for the index declined to
comment on an individual company.
Investor Gary Black, who has been long on Tesla since 2019 and
is the former chief executive of Aegon Asset Management, says
reopening the plant could help Tesla eke out a $2 million profit
for the second quarter. That is based on his estimates for delivery
of 80,000 vehicles helped by results in China and a backlog of
inventory that didn't make it customers at the end of the first
quarter, when the pandemic shut down much of the U.S. and
A profit, he bets, will trigger Tesla's inclusion in the S&P
500. "I think it's 75% likely Tesla generates a GAAP profit of at
least $1 in 2Q, and if that happens, it's 100% likely S&P would
add Tesla to the S&P 500," he said in an email.
Inclusion in the S&P typically brings a rally for a
company's stock, though the gains don't necessarily last long.
Stock performance for companies added to the index between 1973 and
2018 usually fell behind the S&P a year after inclusion,
according to Ned Davis Research.
Tesla's stock price more than doubled in 2020 through Feb. 19,
when it closed at $917.42 a share -- giving it a market value of
more than $170 billion -- before falling as the coronavirus
pandemic hit the U.S. and roiled markets globally. After Tesla
posted a surprise first-quarter profit in late April, its shares
rallied. It again hit a $150 billion market value on May 8 -- the
day Mr. Musk said he was recalling workers to the Fremont factory.
Tesla shares finished trading Friday at $799.17, giving the company
a value of $148.1 billion.
Mr. Musk has a history of surprising Wall Street, sometimes by
triggering accounting levers not linked directly to car sales.
Tesla's surprise profit in the first quarter, when analysts
expected a loss, was aided by a surge in the sale of tax credits
that helped offset the drag on vehicle sales from the coronavirus
This quarter, Tesla has been pushing landlords for rent breaks
that could bolster its bottom line. It also furloughed workers
without pay, while also temporarily cutting salaries of others.
With work at Fremont now resuming, Tesla could enjoy about seven
weeks of production as long as suppliers -- some with their own
plants shut by local restrictions -- can deliver parts in time.
Tesla's only other assembly plant, in China, has been churning out
cars for much of the quarter after a brief Covid-19-linked pause
earlier this year. Any results are contingent on customers wanting
cars, which isn't a certainty amid fears of an extended
Tesla's China performance, where its local plant started
delivering Model 3 cars in December, could be pivotal to its
financial performance this quarter. Tesla sales rose strongly in
the market even as rival car makers were hard hit.
Tesla has orders in hand for future car deliveries, the
company's head of investor relations, Martin Viecha, told Deutsche
Bank, according to Deutsche analyst Emmanuel Rosner. "Tesla's
record backlog of orders should provide a strong pipeline of
deliveries regardless of near-term conditions," Mr. Rosner wrote to
investors last week.
Barclays PLC analyst Brian Johnson doubts Tesla can stay in the
black this quarter. He estimates the China factory probably will
make 39,000 vehicles in the period and Fremont will produce an
estimated 24,000 Model 3s during the period, as it will take
several weeks for the factory to return to a more normal rate of
building vehicles. The one extra week Mr. Musk pushed for is "not
enough to swing" a profit, he said.
Even if that happens, Mr. Musk may not have to wait long to
knock on the S&P's door. If Tesla posts a loss in the second
quarter, a rapid rebound in the third could still propel the car
maker to its cumulative goal. Analysts expect profitable third and
fourth quarters to bring Tesla a total annual profit of $190
Write to Tim Higgins at Tim.Higgins@WSJ.com
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