It is surely a rash investor who assumes that an abrupt change in a company’s performance either way over just three months represents a fundamental reversal of fortunes.
Yet in the case of Tesla, the US electric car maker, there were so many positive indicators in its third-quarter results on Wednesday that it is tempting to conclude just that.
Tesla is one of the most closely watched of the world’s listed companies, partly because of the audaciousness of its ambition and the often unpredictable charisma of its billionaire co-founder Elon Musk.
The South African-born entrepreneur, 48, was the driving force in establishing Tesla in 2003 and based it in Palo Alto, California at the heart of the Silicon Valley technology district, to emphasise its state-of-the-art wizardry and sustainability in its almost entirely autonomous electric vehicles.
Think of sleek high-performance vehicles, capable of accelerating from 0 to 60mph in about five seconds, but with a battery life that lasts for about 310 miles.
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As well as cars and trucks, Tesla develops and operates solar and other energy storage systems, although this is a tiny part of its revenues. The company, which has been consistently loss-making, is listed on the Nasdaq exchange in the US and has a market value of more than $45.6 billion.
So, Tesla’s third-quarter results were striking first because of the unexpected return to profit: the carmaker made $143 million over the three months to the end of September, reversing two successive quarters of heavy losses.
Second, it did so on a fall in revenues of more than $500 million to $6.3 billion against $6.82 billion over the same period the previous year. Tight cost controls at the company meant its operating expenses fell to $930 million in the quarter, against just under $1.1 billion for the previous three months.
The emphasis on efficiency — costs were referred to 16 times in the relatively brief statement to investors — led to better production schedules, lower manufacturing and raw material costs and, ultimately, higher quality vehicles.
And it has led to an improvement in gross margin on carmaking of just under 4 percentage points, to 22.8 per cent in the third quarter.
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The final feature of the results is possibly the most important and is about promises. Tesla has developed a worrying reputation for overpromising and underdelivering, particularly on production schedules.
This week’s update is full of promises not just met, but met early. The company’s new low-cost “gigafactory” in Shanghai, China, for example, has begun trial production ahead of schedule; the development of its new Model Y performance motor is progressing more swiftly than expected and is likely to be available to buy — at a starting price of about $48,000— next summer.
These factors are significant not just because they are milestones but, because building cars at the Chinese gigafactory is likely to be 50 per cent cheaper than in the US, and local demand is also expected to be strong.
On the face of it, Tesla has clearly turned a corner, grown up as a company even, but it’ll need more sustained evidence than just a single quarter before confidence fully beds in. The company, which pays no dividend, is after all expected to post a substantial loss over the full year.
The shares, rated a “sell” the last time this column looked at the end of May, have since risen by more than a third; yesterday they jumped by another 16.7 per cent, up $42.55 to $297.23 as investors applauded the update. Wait a little longer before following suit.
ADVICE Hold
WHY Investors should look at more than a single quarter for evidence of a recovery at a loss-making company with a patchy record
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Energean Oil & Gas
Energean Oil & Gas should consider changing its name, or shorten it at the very least. While technically speaking it explores for and produces both commodities, in reality this company is really only in the business of gas, which accounts for 80 per cent of what it does.
The FTSE 250 company markets itself to investors as a “transition” energy player; that is, one that specialises in a source that is expected to be prevalent as the world gradually moves from the old model of polluting substances such as coal to renewable areas including solar and wind power.
Energean Oil & Gas began life in 2007 when the then Aegean Energy bought an oil-producing field in Greece containing about 2 million barrels of reserves. It subsequently expanded its portfolio through some timely acquisitions to include oil and gas assets in other countries in the Mediterranean, listing its shares at 455p apiece in March last year.
The group has made two other acquisitions of particular note. In August 2016, the company paid up to $148.5 million to buy the Karish and Tanin fields off the coast of Israel, as part of a $1.6 billion funding package to develop a giant processing and storage platform capable of dealing with gas from the two deposits plus others located in neighbouring fields. Then in July this year, it paid $750 million to buy the gas portfolio (plus a small amount of oil) owned by Edison, of Italy. Without dwelling on it, the price paid represented just 1.7 times the target’s pre-adjusted profits in the previous year, showing Energean’s panache at doing deals.
The acquisitions made Energean Oil & Gas the biggest independent exploration and production company listed on the London market. It has a total of 639 million barrels of proven and probable reserves, the vast bulk of it gas, that will produce 140,000 barrels a day when it starts to come on stream in stages from next year.
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The shares, up 3p or 0.3 per cent to 952p yesterday, have risen in value by 60 per cent in the past year. They carry no dividend and are valued at 17.4 times Panmure Gordon’s forecast earnings, which is a premium rating for an energy company. Still, it should deliver over the long term.
ADVICE Hold
WHY Quality gas-focused producer with eye for smart and cost-effective acquisitions
