Automotive

Tesla – Musk baits the regulator again?

Anton Wahlman on Seeking Alpha has reported that Tesla held a secret telephone conference call to a limited audience which apparently contradicted statements made earlier in the public domain. If true, from a pure compliance and governance perspective that would violate fair disclosure rules. It is surprising that given Elon Musk’s run ins with the SEC that shareholders would hope he’d look to avoid further investigation rather than taunt the regulator.

According to the call transcript, Tesla provided new profit/loss guidance to the select few on the call. Even more bizarre is that Deutsche Bank compliance apparently let its Tesla analyst publish a report on March 1 based on the contents of the call, including margin guidance on the $35,000 Model 3 which was not divulged to others.

CM has always held that Tesla is an amateur car maker. Luring owners to deposit a non refundable $2,500 for a $35,000 Model 3 smacks of a silent fund raising to keep the ship afloat.

The company recently admitted it would close much of its dealer network and move to mobile servicing. Cute in principal but unlikely to be sustainable. Mainstream makers know that dealer/service networks are vital to keeping customers connected. If large recalls need to be conducted, mobile units aren’t going to cut it.

None of the above really surprises. Owning Tesla is sort of like joining a cult. The preachings from the fearless leader are designed to keep the disciples fiercely loyal. However if the government gets enough evidence to gather the SWAT team it will swarm the compound. This company is not worth anything like $50bn. Grab your popcorn.

If the Green New Deal bans air travel…

…CM looks forward to catching a train to Hawaii.

Alexandria Ocasio-Cortez also intends to get every fossil fueled powered car off the road in a decade. The US has 270 million registered vehicles, the overwhelming majority being petrol powered. The US sells 16-17mn cars a year (sadly slowing). Therefore in the US, 16 years would be required to achieve that target. That’s before taking into account auto maker EV capacity.

Global EV sales were 2.1mn last year. So her plan would take 128 years. That’s unfair as capacity would grow. Let’s assume auto makers could conceivably increase capacity by 2m every 2 years (plants take 2 years to build and those poor Congolese child slave laborers will be run off their feet digging for cobalt to go in the batteries) then conceivably 30mn.cumulative EV units could be built over 10 years. That’s 11% of her goal. Let’s not forget the fossil fuels required to power auto factories to satiate this plan not to mention the steel that goes into the bodies.

Global auto production is c.80mn units. That assumes that the world’s auto makers will snub the ROW to meet her demands.

Socialist mathematics is never quite up to the task. Is Ocasio-Cortez was a true patriot she’d demand GM, Ford & Tesla be the sole products that consumers are allowed to buy to support domestic jobs. They’ll need them because she’ll be causing the lay offs of a shed load of Boeing line workers if planes are banned.

When she finally gets into the Oval Office we should look forward to her catching Ground Force One from 1600 Pennsylvania Avenue Station to travel the country and tell Americans how much better things have become.

Harley has another Howler

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Harley-Davidson (HOG), perhaps the most iconic form of discretionary spending, came out with a howler set of Q4 numbers.  Revenue down 9% and operating losses in the last period. FY operating income fell 30% on revenues that finished 1% up. Domestic sales for the 2018 year fell 10% while international sales were flat. Worse was guidance pointed to unit sales falling between 217,000 & 222,000 units down from 228,000 in the fiscal year just past. This new range of unit targets would mean a decline for five consecutive years. If this pattern continues into 2020, luxury competitor BMW, which targets 200,000 units, will likely even up the tally, despite being less than half HOG was in FY2012.

Operating margin guidance for the motorcycle segment is forecast at 8-9% in 2019 down from 12% in 2017.

In June 2018, CM wrote, ““Harley-Davidson (HOG) is the classic case of a divine franchise. While still the world’s largest maker of cruiser motorcycles, it is being swamped by new competition. HOG’s EBIT performance has slid for the last 4 years and is even below the level of 2012…Sadly for HOG, 1Q 2018 has revealed even worse numbers. Global unit sales were 7.2% down on the previous year and 12% down at home.  Japan and Australia were soft. Looking at the strategy it looks like throwing spaghetti at a wall and hoping it sticks.

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Harley may have a grand master plan to incubate 2,000,000 new riders and launch 100 new bikes out to 2027, but all the while they remain stuck in a design studio, the competition, including the Japanese, keep stealing sales away from the Milwaukee icon.

The strategy looks completely unrealistic because growing 200,000 new bikers a year for a decade in the domestic market would mean that based on 2019 global unit sales projections,  92% of customers would need to be brand new, not repeat or existing. However the plan is to grow in the US where it had 138,000 sales in 2018 that would mean new customers would need to be 145% of all current sales in the US. No auto maker on the planet has ever had such pie in the sky assumptions for cultivating new customers, much less at that pace for 10 straight years. How can the board of HOG honestly think this is even remotely achievable? Sadly the company has been too eager conducting buybacks to flatter EPS. Net income for HOG was +1.8% for FY2018, diluted EPS was +5.6%. Time to stop playing games and properly delivering for shareholders.

Naomi Osaka edition Nissan GT-R sells out

While Carlos Ghosn maybe wasting away in a Tokyo detention centre, Nissan is not wasting the talents of Naomi Osaka. At a puffy ecomentalist launch of the new Nissan Leaf EV, one of the board director’s asked the then just crowned US Open winner what car she’d like and without hesitation it was the GT-R. Why? “Because it is fast.” So despite breaking every politically correct rule as goes a green car launch, Nissan got religion and sold out 50 Naomi Osaka edition GT-Rs in a heartbeat. It looks like Naomi run #2 reservations can be made in Feb. Capitalism wins again. Surely the margins on Naomi GT-Rs will outstrip any margins made on Naomi Leafs.

Watch Japanese companies fumble over getting her to star in their commercials. You know what? Best to buy a basket of Naomi Osaka stocks on the TSE. CM wrote a piece on stocks and Japanese idols – there is correlation! Smaller caps tend to benefit more. Valuations largely irrelevant.

As CM wrote it is any wonder a financial institution hasn’t made a Naomi ETF?

When the supervisor can’t follow the rules

Japan Exchange Group’s (owner of the Tokyo Stock Exchange) CEO Akira Kiyota has agreed to take a 30% pay cut for 3 months after admitting he’d broken internal rules on prohibited investment.

Surely as the supervisor of one of the largest stock exchanges in the world there would be sufficient systems in place to prevent such embarrassing events. A bit hypocritical to come down hard on listed corporates when the headmaster can’t follow his own rules.

As a former stockbroker, it was a sackable offense to make stock and bond investments without sign off from compliance and a manager to mitigate any risk of insider trading. It is a bit rich to suggest the JPX boss wasn’t aware of his internal rules and had he any doubt whatsoever it would have been an easy discussion had with the relevant department.

Corporate governance in Japan remains woefully inadequate. The JPX board has approved the ¥20mn (US$180k) profit made by the CEO on the initial ¥150mn (US$1.3mn) investment be given to the Japanese Red Cross. Will that be pre or post any capital gains tax? Why isn’t the board calling for him to resign? Why isn’t Kiyota resigning on principle to save the organization’s stained reputation as the vanguard of best practice?

Then again we should not be surprised. It took months for the JPX to remove/suspend Toshiba from the best in class corporate governance index (JPX Nikkei 400) after its accounting scandal became outed and there has been no investigation of Kobe Steel when blatant insider trading was visible to a novice. It leaked information about its fraudulent product specifications to customers three weeks before announcing to the market. All the tell-tale signs of heavy short selling positions on many multiples of average daily volume traded on the day of informing clients was evident. Yet nothing was even suspected, investigated or referred to the regulator.

Then take a look at the saga of Nissan. Documents have revealed former CEO Carlos Ghosn supposedly washed his multi-million dollar personal investment losses through the company as well as using Nissan money to buy several private properties in his name. That would still require the board to be willfully blind to sign off on such big ticket items or point to woeful internal controls. What governance structures could be in place when there is no board accountability over Ghosn’s actions? Being bullied by a dominant CEO is no excuse. The board should have tendered their resignations en masse.

Indeed there have been countless corporate governance lapses overseas – Parmalat, GSK, Stanford, Enron, Tyco etc- but in Japan there is little or no punishment for most executives who break laws (internal or external). Throwing the book at Ghosn will be an exception. Most C-level managers in Japan escape with little more than wounded pride.

Cutting salary for misdemeanors is woeful governance too. The biggest way to force compliance is to threaten a Japanese boss’ company car privileges. The highest status for a CEO is to be whisked around in a personal Toyota Century. Stripping it would literally force corporate leaders to do the walk of shame.

How many canaries in the coalmine do we need?

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CM has said for ages that President Trump risks being hoisted by his own petard if he continues to attribute the stock market to his leadership. It works both ways. Stock markets are suffering. Suck it up.

GM has announced it is pulling the plug on over 14,000 US workers (8,000 white collar, 3,300 blue-collar workers in Canada and another 2,600 in the US) and potentially closing  5 plants. Is this a surprise? The chart above shows the % year over year change of US car sales. It has been stepping down clearly since GFC. In September this year GM’s sales slumped 19% in before falling 5.5% in October. The brutal storm activity is unlikely to help November either.

This quote will live to haunt in the coming downturn – CEO Mary Barra said the company doesn’t predict an economic downturn any time soon and is making the cuts “to get in front of it while the company is strong and while the economy is strong,

50% of US corporations have a credit rating of BBB or less. We are at the sharp end of massive government sector recapitalization crowding out and companies with dodgy balance sheets (that have levered up to conduct massive buybacks to flatter EPS masking anemic earnings growth) won’t be given the same tight interest rate margin spreads come the next refinancing. Await the implosion.

Rising interest rates don’t help and credit markets wait like vultures over the likes of GE which is having a reality check over its $115bn of debt, negative equity and troubled restructuring. Credit rating downgrade have booted it from some funds so the stock is in the cross hairs. If it had any sense it would file for Chapter 11 to buy breathing space.

If you want to put some perspective on it, GE’s market cap in 2000 was $592bn and now is $65.8bn. Tesla is now worth $56bn.

GM is yet another canary in the coalmine