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Will SolarCity's Loss Affect Tesla? Investors Don't Care -- Yet

Feb. 15, 2017
Merger integration is no small feat, and Tesla has been mum about how SolarCity will fit in.

For Tesla Inc., there’s been little light shed on what the acquisition of money-losing SolarCity Corp. will mean to the bottom line. That hasn’t stopped its shares from nearing a record high.

Heading into the combined company’s first earnings report since Chief Executive Officer Elon Musk closed the controversial $2 billion deal in November, Wall Street is at a loss for how to predict the company’s results. Only a few analysts have begun to include the solar-panel installer in their financial models, while others are waiting on more disclosure.

It’s not mattered yet for shareholders, who have focused instead on Musk’s promise to unleash his most affordable car yet later this year, and on his surprising rapport with President Donald Trump. Tesla’s stock has been on a steady upward march since early December, shortly after the SolarCity acquisition closed. The shares finished at $280.98 on Tuesday, less than 2 percent below the record close of $286.04 logged in September 2014, and slipped 0.8 percent as of 2:33 p.m. in Wednesday trading.

“We do not know how Tesla plans to report SolarCity results in the future and it remains unclear to us how peers are incorporating (or not incorporating) SolarCity into current estimates,” James Albertine, an analyst with Consumer Edge Research, wrote in a Jan. 31 report. “We will await further details from management before rolling the solar panel business into our model.”

Merger integration is no small feat, and Tesla has been mum about how SolarCity will fit in. One question, for example, is whether the company will be folded into Tesla Energy -- which sells batteries to homes, businesses and utilities -- or remain its own business unit. Tesla declined to comment on how it plans to include SolarCity in its upcoming earnings report.

Estimates for the fourth quarter results Tesla is scheduled to report Feb. 22 vary wildly, from an adjusted loss per share of $2.13 to a profit of 10 cents, according to data compiled by Bloomberg. Only three analysts were covering both Tesla and SolarCity prior to the acquisition that closed in November.

Awaiting Clarity

Ben Kallo of Baird Equity Research says he’s keeping SolarCity out of his analysis as he’s “waiting for more clarity around targets.” Kallo, Jeffrey Osborne at Cowen & Co. and Colin Rusch at Oppenheimer & Co. covered both Tesla and SolarCity prior to the acquisition, according to data compiled by Bloomberg.

Whether SolarCity will deliver a boost or a blow to Tesla’s earnings, the Model S and Model X maker may be watched as closely for any updates from Musk on the timeline for the Model 3.

The company stopped giving a running total of $1,000 deposits taken for the car as of May, when it disclosed about 373,000 reservations. Musk said on an earnings call in May he aimed to produce roughly 100,000 to 200,000 Model 3s in the second half of 2017.

“I’ll be shocked if they come out and say they’re selling” that many, Cowen’s Osborne said in an interview. Osborne, who includes SolarCity in his model, said he’s expecting Tesla to break out its earnings into three categories: auto sales and leases, solar sales and leases, and other units including services.

The hype Tesla has generated with the Model 3 has helped vault its market capitalization past $45 billion, exceeding Nissan Motor Co. and approaching Ford Motor Co.

The fourth quarter earnings and guidance for this year may be “noisy” because of the integration of SolarCity, Kallo wrote in a Feb. 9 note. Still, he believes investors’ primary focus will be on ramping up Model 3 output.

Model 3

The Model 3 will cost about $35,000 before government incentives, and the company has said it expects to begin manufacturing the car this summer. Tesla is pausing production of its other models at its lone auto plant in Fremont, California, for a week this month as it adds capacity to its paint shop and performs maintenance on other equipment to prepare for the new model.

“This will allow Tesla to begin Model 3 production later this year as planned and enable us to start the ramp toward 500,000 vehicles annually in 2018,” the company said in an e-mailed statement.

Tesla already announced fourth quarter deliveries of 22,200 cars worldwide, bringing its total to 76,233 in 2016, less than the company’s initial forecast for 80,000 to 90,000. Tesla has yet to give guidance as to how many cars it plans to deliver in 2017.

Cost Savings

As it approached the close of the SolarCity deal last year, Tesla said it was expecting “significant financial benefits” for the combined company, including about $150 million in cost synergies within a year. Tesla has also said SolarCity will add $500 million in cash to its balance sheet over three years.

Most of the savings are expected to come from combining the two entities’ sales and marketing teams with Tesla’s retail footprint to sell electric cars, solar panels and Tesla’s home battery product, the Powerwall.

For analysts, the proof will be in the pudding.

“One of the pervasive issues facing TSLA is what the financial model will look like after the integration of SolarCity,” Oppenheimer’s Rusch wrote in a Jan. 31 research note to clients. “We expect TSLA to highlight synergies and break out metrics to show the health of each business line.”

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