Shares of SolarCity Corp. (NASDAQ: SCTY) were on the rise ahead of its earnings after Elon Musk and Tesla Motors Inc. (NASDAQ: TSLA) announced their intentions to acquire the company. The solar energy producer is expected to release its second-quarter earnings report after the markets close on Tuesday. Although the acquisition may not sway the numbers so much in this report, the sentiment going forward will be what to pay attention to.
The consensus estimates from Thomson Reuters call for a net loss of $2.44 per share on $146.08 million in revenue. SolarCity posted a net loss of $1.61 per share on $102.8 million in revenue in the same period of last year.
Recently, Merrill Lynch reiterated its Underperform rating on Tesla, and the firm has a $155 price objective. The firm’s Stephen Albert and Lorraine Hutchinson believe that company-specific initiatives will continue to challenge Tesla’s earnings. They also see a drag on cash flow and on its returns in the near term, and the SolarCity deal only adds further risk to Tesla’s fundamental business.
The first concern is that SolarCity’s addition may not be so sunny. The team sees limited synergies and worries about the recent loss-making and cash-burning business status of both companies, calling the industrial logic still vague.
Merrill Lynch also worries about earnings and cash flow being light in the second quarter. This was as deliveries have been under estimates. Elevated operating costs and cash burns were cited too.
A third issue is that deliveries look delayed and confused. The 14,370 cars delivered were more than 15% under the firm’s estimate and was lighter than its own forecast of 17,000.
Another issue is the end of the Tesla resale value guarantee, leaving customers on their own. This ends the assurance that Tesla customers can resell their Model S/X back to Tesla after three years at a set price.
The fifth concern is that the lower-priced Model S and X begs the question: if demand is so strong, why offer mix and price-dilutive variants?
Tesla’s recent autopilot crash is also a negative, but not material.
The seventh issue is that the master plan announcement may be a master distraction in a strategy to become a sustainable energy company. The plan lacked specifics on how it will achieve such objectives and how it will generate earnings, cash flow and returns that its shareholders should expect.
A few analysts weighed in on SolarCity ahead of the earnings report, and it looks like everyone is holding their breath:
- Avondale Partners has a Market Perform rating.
- Roth Capital reiterated a Neutral rating with a $19 price target.
- Raymond James has a Market Perform rating.
- Baird has a Neutral rating with a $25 price target.
- Guggenheim has a Neutral rating.
- Credit Suisse has a Neutral rating with a $27 price target.
- Barclays reiterated a Sell rating.
- Needham reiterated a Hold rating.
- Morgan Stanley has an Equal Weight rating with a $24 price target.
- Deutsche Bank has a Hold rating with a $25 price target.
So far in 2016, SolarCity has underperformed the broad markets, with the stock down 52%. Over the past 52 weeks, the stock was down roughly the same amount.
Shares of SolarCity were last seen up 1.2% at $24.60, with a consensus analyst price target of $23.76 and a 52-week trading range of $16.31 to $58.87.
Tesla shares traded up 1.6% at $229.85 on Tuesday. The consensus price target is $240.08, and the 52-week range is $141.05 to $271.57.
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