Tesla Motors Inc Extended Warranty To Affect Q3 EPS By 10 Cents

Tesla Motors Inc Extended Warranty To Affect Q3 EPS By 10 Cents
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On August 15, Tesla Motors Inc (NASDAQ:TSLA) announced that it had extended the Model S drivetrain warranty to eight years. The move came after Consumer Reports said that the Model S sedan develops some problems after long-term use. Pacific Crest Securities said in a research note on August 27 that it has lowered its estimates for Tesla. However, the research firm remains confident about the company’s growth story, as reflected by its Outperform rating and $316 price target.

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Investors should focus on Tesla’s policies that will drive demand

Pacific Crest said the longer drivetrain warranty will reduce the EV maker’s gross margins modestly. But solid near-term execution, optimism around the upcoming Model X and Gigafactory would fuel the stock. Investors should remain focused on the company’s policy that will help drive demand for Tesla cars. Pacific Crest estimates that the increased warranty would cost Tesla an average of $300 per 85kWh Model S.

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That equates to about 30 basis points of gross margin headwind going forward, resulting into a 10-cent EPS impact in the current quarter. That includes a one-time charge of $10 million for cars sold in arrears. At the time of announcement, Tesla CEO Elon Musk admitted that the longer warranty would affect the company’s margins modestly. It will negatively affect the fourth quarter earnings by three cents.

Pacific Crest lowers its EPS forecast for Tesla

Therefore, Pacific Crest has lowered its FY2014 EPS estimate from $1.30 to $1.17. For 2015, the research firm reduced earnings estimate from $3.18 to $3.08, though it maintains its revenue guidance of $6.14 billion. Pacific Crest also downwardly revised the EPS guidance for FY2016 from $7.99 to $7.84 on revenue of $11.40 billion.

Recently, Pacific Crest analysts visited Tesla’s Fremont manufacturing plant. They assured investors that the production line tracking was in line. What’s more, Tesla is reportedly planning to install a huge billboard near its Fremont factory.

Tesla shares inched up 0.28% to $264 at 2:21 PM EDT on Thursday.

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