Tesla Falls on Lowered Delivery Guidance
Tesla’s (TSLA) shares fell following the release of its second-quarter results August 5, despite beating consensus estimates on revenue and earnings per share. The firm reported non-GAAP revenue growing 40% from the year-ago period to $1.2 billion, and a non-GAAP loss of $61 million or $0.48 per share. The company was significantly cash flow negative through the first half of 2015 due in large part to capital expenditures for capacity expansion and tooling associated with the new Model X and the construction of the Tesla Energy Gigafactory. Management claims its capital spending is more efficient than ever in terms of capital spend per unit of incremental capacity, which will be necessary to get the firm to profitability as it continues to eat into its balance sheet cash–cash and cash equivalents declined by $359 million from the first quarter to $1.15 billion. Company quarterly records were set for vehicle production and deliveries in the quarter, which grew at ~46% and ~30% on a year-over-year basis.
However, Tesla Motors lowered its vehicle delivery guidance for the full year. The company now expects to deliver between 50,000 and 55,000 vehicles in 2015, compared to previous guidance of 55,000 due to potential issues in its supply chain associated with the ramp in production late in the year. This is a key example of the speculative nature of Tesla. We think the firm and its innovative products in both the automotive and energy storage markets have tremendous upside, but its operations have yet to be tested on a large scale. The lack of dependability across production is what has caused the lowered guidance, not lowered demand for its products, and a cyber-security scare has added uncertainty to the safety of advancing auto technology. The speculation continues, and the resignation of CFO Deepak Ahuja isn’t helping matters.
Keurig Green Mountain Not Brewing Growth
Keurig Green Mountain (GMCR) reported lackluster fiscal third-quarter results August 5, and shares fell amid speculation over the firm’s long-term growth sustainability. Net sales declined 4% excluding the impact of foreign currency, but brewer and accessories sales were reported to have fallen 26% on a year-over-year basis in the quarter. The large decline was driven by an 18% fall in brewer volume due to high levels and timing of restocking of retail inventory. Pod sales were roughly flat on a constant currency basis due to positive pricing and volume being offset by unfavorable product mix. Reported non-GAAP diluted earnings per share fell 19% to $0.80 in the quarter, and free cash flow dropped 55% from the year-ago period.
The sustainability of Keurig Green Mountain is concerning investors. The future growth of sales volumes of the company’s pods–accountable for over 80% of sales–is directly tied to the growth in its brewer sales volumes, as it is the only product on the market in which the pods can be used. This may have once been viewed as a competitive advantage, but the market is likely seeing the potential challenges to its business model. In essence, investors are finding that there is a ceiling to Keurig Green Mountain’s growth. Though we are not saying the firm has reached that ceiling just yet, we believe that the long-term sustainability of the company’s business model may not be suitable as a stand-alone company. An eventual take-out from a larger beverage producer–Coca-Cola (KO) already has a ~16% stake in the company–is likely the best case scenario for Keurig Green Mountain’s shareholders in the long run.
Noodles & Company Margins Melt
Recent earnings reports have not been kind to Noodles & Company (NDLS) shares, and the release of second-quarter results August 6 was no exception. Total revenue grew nearly 16% on a year-over-year basis to $115.2 million in the quarter, driven by new-store openings as comparable-restaurant sales were flat system-wide. Adjusted net income fell over 16% to ~$3.1 billion, and adjusted earnings per diluted share fell from $0.12 to $0.10 from the year-ago period. Contributing to the bottom-line decline was restaurant contribution margin falling nearly 2 percentage points from the second quarter of 2014, due to deleverage on lower average unit volumes from a higher mix of immature stores and increased labor costs.
Management is expecting restaurant contribution margin between 17% and 18% for the full year 2015, compared to ~19% in 2014. The firm is confident that the benefits of its current marketing initiatives are not far off and will help mitigate the negative impact of a higher immature store mix as the new stores build a better-known presence in their respective markets. Revenue will continue to expand at a solid mid-teens clip in the year, driven by new-store openings. The flat to low-single digit comparable restaurant sales growth projection for 2015 is not what it could be for an emerging fast-casual restaurant, and the lack of solid comparable restaurant sales growth has us concerned if Noodles & Company can sustain profitable growth. The firm currently has momentum similar to that of a wet noodle, and we’re not interested.
If you’re “playing” speculative entities in your portfolio, drops of 15%, 20% or more around earnings releases should be expected.