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Tesla Motors Q4 Earnings: Key Items to Look For

Tesla Motors Inc (NASDAQ:TSLA) reports earnings after the market close on February 20th (and the conference call should be exciting). Morgan Stanley analysts expect 4Q to be another quarter where Tesla prioritizes quality of delivery over quantity… Since Morgan’s initiation in March 2011, their near-term volume forecasts have been far below management’s guidance. Morgan’s position is that given the unprecedented, audacious nature of launching such a technologically different product by one of the world’s newest OEMs Morgan Stanley wanted to allow reasonable room for error. Morgan Stanley doesn’t believe the market would be very forgiving to the company (or the stock) if volume targets were prioritized over the quality and safety of the product. Morgan Stanley is “convinced” Tesla Motors Inc (NASDAQ:TSLA)  understands that its early deliveries must be as close to perfect as possible.

Tesla Motors Inc (NASDAQ:TSLA) expects net Model S reservations to achieve a new high water market in excess of the 13,200 tally at the end of 3Q. Given the pace of new store openings (33 stores moving to 60 by the end of 2013) and numerous awards and accolades for the product, they see scope for materially higher reservations, even allowing for the initial deliveries. Morgan Stanley has trimmed their 4Q Model S delivery forecast to 2,300 Model S deliveries from 2,500 previously for 4Q. This increases their estimate of 4Q cash burn slightly to $76m. While Tesla may have achieved a cash flow positive position for a brief period during the quarter, they expect the quarter as a whole to be negative. For 2013, they expect Tesla Motors Inc (NASDAQ:TSLA) to report $4m positive cash flow entirely driven by temporary changes in working capital.

Analysts at Baird believe that Tesla Motors Inc (NASDAQ:TSLA)  appears to have reached its target production run-rate. At the Detroit Auto Show, CEO Elon Musk confirmed Tesla Motors had reached its target production run-rate and was on track to deliver 20,000 Model S sedans in 2013. Their conversations with Model S reservation holders support Mr. Musk’s statement. They believe the process/technology risk around the Tesla Motors story has been meaningfully reduced.

In December, Elon Musk tweeted that Tesla Motors Inc (NASDAQ:TSLA) had narrowly been cash flow positive for a full week. With production fully ramped, Baird would expect the company to be achieving the necessary economies of scale to record its first full cash flow positive quarter in Q1:13. Improving manufacturing efficiency should drive further margin/cash flow improvement throughout the year.

Baird recently raised their price target for Tesla to $45 a share (Tesla is currently trading at $39.00) is based on a five-year DCF analysis. They have lowered their discount rate from 12% to 11% to reflect the lower risk profile at Tesla Motors due to its successful production ramp and potential for a cash flow positive quarter in Q1:13.