Small Cap Value Report (Thur 24 Oct 2019) - TSLA, PCF, DIS, SOLI, SHOE

23rd Oct '19 by Graham Neary

37 comments 9270 reads

Good morning,

I was up last night to catch the results from Tesla ($TSLA) - what great relief that I didn't have a position in it!

This morning, I think I'll say a few words about that before moving on to discuss:

PCF (LON:PCF)
Distil (LON:DIS)
Solid State (LON:SOLI)
Shoe Zone (LON:SHOE)

Tesla ($TSLA)

Share price: $298 after hours (+17%)
No. of shares:179 million
Market cap: $53.3 billion

Q3 2019 Update (pdf - external link)

This was an incredible result from Tesla, and I'm very pleased that I had no position in the stock last night!

What appears to have happened (though many of the bears don't believe it yet) is that Tesla has achieved a new level of fiscal discipline. This would be the combination of both learning how to make its cars more efficiently, and also trimming a lot of the fat from its overhead expenses.

This was necessary, since revenues have been under pressure.

This goes back to a very important point about how car sales and revenues are interpreted. Tesla and Elon Musk are very proud that have they have been able to sell all the vehicles they produce, but I don't necessarily agree that this is something to be proud of - surely what matters is average selling prices (ASP)! There should be no problem moving metal if you are constantly cutting prices, and that is what Tesla has been doing.

Average selling prices declined again in Q3, due to the mix effect of selling more of the cheap Model 3's, and lower ASPs on all models.

Therefore, despite delivering more cars, the company's Q3 automotive revenues ended up declining by 12% to $5.3 billion, compared to Q3 last year. Automotive revenues were also lower compared to the most recent quarter this year.

Fortunately for Tesla, its operational improvements led to an improvement in automotive gross margin to nearly 23% - this is still lower than Q3 last year, but it is the best result so far this year.

Central overheads also declined by the best part of $200 million for the quarter.

The final result was operating income of $416 million. After the hefty interest bill, net income was…

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Graham Neary

24th Oct '19

No probs Wombat!

rmillaree

$tsla - one good thing with now regard to tsla is that finally musk seems to have learned that shutting ones trap and not over promising and therefore providing a slightly smoother path is the way forward. I still think he messed up majorly by not raising $5bill+last year via issuing equity when the shareprice was over the $350 mark - but i think he was on some sort of different planet at the back end of last year. Perhaps if the share price creeps much above $300 he will right that wrong and use the cash accelerate the pickup time to market.

In some respects the new china gigafactory completion and the model y progress both being ahead of where they previously advised shows their more mature approach to updates now.

I remain on the sidelines investment wise while they still have ongoing margin headwinds going forward - i do doff my cap to them though in the fact they have made the model 3 what it is )mass model car production) now that they are exiting the period where the us taxpayer will provide financial support - they have probably single handedly brought forward the mass use of electric cars from where it would have been by 5 years i would guess had they not forced the main players to pretend that they are trying to match them. all we need to now is the renewable electric generation to complete that picture.

Camtab

Dipped my toe into Shoezone this morning, all be it rather later than I would have wished. I like the management team, and the product (who doesn't need shoes?) Balance Sheet strong, good cashflow and a record of paying out good divis. Add to that a healthy share price drop (agreed for good reason) and some solace in a sensible announcement today. In a risky world I am a happy man £1.28.

simoan

Thanks Si thats a learn any idea how long Stocko takes to get the figures back in line with last company update ?

Given that the actual results are not until 8th Jan 2020 and the Stockreport takes about 4 weeks to update, I'd take a look at the Stockreport first week of Feb 2020.

All the best, Si

Shoe Zone (LON:SHOE)
I guess my main query here would be how far along the line are they with regard to stopping the sales decline ? - if things only worsened since may and have remained static since then i would guess they will have a tough comparitives to match for h1 of the new year. At present stocky has higher 2020 earnings estimates than 2019 and this seems a tad optimistic unless the company have formally confirmed this with their brokers - i guess any updated house broker forecasts for 2020 will hopefully enlighten us in this regard.
If i take quiz as a similar recent example they still haven't really given any indication that the downward trend has stopped whilst giving little visibility in the intervening period - hopefully shoe won't have that problem and will officially nail something approaching 17p ish eps to the mast for them to shoot at. I could be tempted to have a bit of bottom feeding here but i am minded to wait and see how the first current year actual comparatives pan out - no doubt by that time any bottom fishing chances may have vanished - we are already nearly up 20% from the lowpoint already in that regard.

drvodkaquickstep

Yes I was encouraged by results from RPS (LON:RPS) which are somewhat of a mixed bag but new management are still fairly early on in their turnaround to remove costs and streamline the operations. New management in the form of Ken as chairman and John as CEO seem to be well received compared to their acquisition hungry predecessors. Debt clearly needs to come down and hopefully further acquisitions will be very selective.

My chapter and verse thesis is covered here:

https://cube.investments/rps-group-takeover-target-rps/

Albertos

Shoe Zone (LON:SHOE)

The whole sales thing is a bit weird.

The TU this morning said that sales would be £161.9m - sales last year were £160.6m - so they've actually increased.

The sales in the half year to March 2019 were £73.0m, down from £73.7 in the corresponding period - a fall of 1%. This means the sales in the second half to Sept 2019 are £88.9m compared to £86.9m - a rise of 2.3%.

This suggests overall sales are not a problem. I therefore think the problem is actually the smaller shops (as opposed to their expansion into the Big Box format) dragging on revenue and profitability until they are closed. Hopefully Shoe Zone (LON:SHOE) still has the shortest lease life in retail.

Phil

cholertonandrew

Is anyone else having problems with email RNS notifications from Investegate?

Thanks
Andrew

Friday31

Yes, not getting RNS emails, can't find out why and really miss the alerts.

Laughton

Interested to read from today's interims from Distil (LON:DIS) that "Given the prevailing headwinds in our chosen markets, particularly the UK gin market" and whether this spells problems for Fevertree Drinks (LON:FEVR) ?

I appreciate that Distil (LON:DIS) is very small and Fevertree Drinks (LON:FEVR) is quite big and that Fevertree Drinks (LON:FEVR) are attempting to break into many other markets and not solely tied to the gin market (I really like their ginger beer).

What does the panel think?

I don't hold Distil (LON:DIS) but I do hold Fevertree Drinks (LON:FEVR)

Damian Cannon

Same here. No emails at all for most of the week and they haven't even caught up like they used to do. Rubbish service.

Lion Tamer

Re: RNS notifications from Investegate

Yes, mine have been slow or missing this week too. Back in May I had similar problems and complained to their support people (fesupport@financialexpress.net). They asked for example emails with header info and did manage to get things working more smoothly for me, and it only took them until September. I might need to raise another ticket if this continues.

Cheers Andy, I'm on the case re: Shoe Zone (LON:SHOE)

G

Fevertree Drinks (LON:FEVR)
Laughton
"Given the prevailing headwinds in our chosen markets, particularly the UK gin market" and whether this spells problems for Fevertree Drinks

I also hold fevertree.

Possibly - i hold Fevertree and have paid top whack price for my shares (and then some - some may say). I paid approx 2600p and you can now buy the shares at 2140p - stocky pe is now down to 33 and i am guessing that number will reduce again once we get into the new accounts year in January if everything stays as it is.

Traditionally Fever have started the year with conservative forecasts and upgraded expectations as the year goes on - this year is the first year i can remember where the expectations have tallied off - from 60p eps peak mid year back to 57p now - basically where it was at the start of the year. Fever also did say in July that the UK market was having issues - so i am hoping any cross read is of the type that Fever have already updated on. There is also a bod on the other place posting that wholesale sales have been very low recently compared to the prior year - they work in the trade - whether anyone believes that info and how relevant it is i have no idea.

. While we have not been immune to the impact of the unseasonably poor weather in the UK, we have further strengthened our market leadership position within the UK and have seen positive momentum in Europe and the rest of the world reflecting our increasingly global footprint.

In summary i am hoping guessing that there will be no further poor uk trading from fevertree but if i had to gamble i reckon the second half of this year is more likely to be poor than good news - i think short term the us news is probably more likely to move the shareprice one way or the other.

I still have 100% confidence in the brand and when i bought i had spare cash and thought at that time i would rather be in at that top whack price that was available rather than sat on the sidelines - even 2600p is quite a depressed point compared to the highs. I guess i just need to tuck tis one under the rug forget about it and hope the current Gin craze lasts as long as it did back in the 1700's.

Re Investegate RNS notifications.

Thanks all for the replies. I’ve emailed the company and hopefully they’ll resolve it. Before when there’s been an outage, the emails normally flood in later in the day but I don’t think I’ve had any for a couple of days now.

Regards
Andrew

andrea34

25th Oct '19

I contacted Solid State (LON:SOLI) investor relations yesterday with my slight concern over the small rise in the order book, and received a timely response as follows:

Thank you for your enquiry. The open order book at any period end reflects a snap shot in time and can significantly vary depending on the timing of specific orders being received and product being shipped. Last year we saw a very strong order in take with the benefit of the $3.2m VPT order which was deliverable over 3 years, and the £4.3m multi year smart warehouse Power order in addition to the benefit of Brexit stocking, thus the order book was at record levels.

As I am sure you are only too aware the macro-economic environment is very uncertain and means we are facing a very challenging business environment, which is resulting in customers continuing to place orders but with shorter schedules.

Therefore to have continued to have grown the open order book over the strong base (albeit modest growth) reflects the continued hard work to win orders in the very challenging market and gives the Board confidence that we are on track to meet the full year expectations.

Rusty2

I had a look at gin sales I can't see anything about sales falling, in fact one report in Aug 2019 forecasts gin sales to rise by 30% for the next year, also for this year sales have risen. So that does not seem to tie up with Distil (LON:DIS) comment.

Fevertree Drinks (LON:FEVR) I used to hold, I sold out as growth has slowed, they did exceptionally well with the rise in gin sales but I'm not sure can will repeat that again but we shall see. I think for Fevertree Drinks (LON:FEVR) the US is the big factor, if they can repeat what they did in the UK there then the shares will really take off, I still feel one of the big drink companies will bid for them.

HHR

26th Oct '19

Hello Graham,

I've been thinking about your sentence

"Because I still expect competition to be extremely tough in this sector, I still believe that this will make for a terrific shorting opportunity some day,"

Apologies in advance if I am reading too much into your choice of words! By 'sector' I am assuming you mean EVs. And I'm taking an inference from your use of the word 'still' that the emergence of competition is taking longer than you expected?

I am a longstanding $tsla shareholder and I too am surprised at the apparent difficulty other manufacturers are having in getting a competitive EV to market. I suspect Tesla's technological lead on EVs is more sophisticated than I had assumed.

However by focussing on Tesla as an EV manufacturer I think analysts are overlooking other potentially more important competitive advantages Tesla has.

7 years after the Model S was launched, if we waved a magic wand today and planted a Model S, X and 3 equivalent in the ranges of every competitor, and then restarted the race, I wonder how rivals would replicate the following Tesla 'non-EV' competitive advantages :-

- Software including autopilot. The US leads the world in software so it's no surprise that Tesla leads on connected car and autopilot

- Absence of dealer network with resulting direct increase to Tesla margin as well as indirect (through the removal of dealer stock and resulting working capital efficiencies)

- Young, cool, anti-establishment brand

- If/when autopilot becomes ubiquitous one impact could be significantly reduced global sales and over capacity (in the west). Tesla has a relatively low manufacturing footprint and is better placed than rivals who would have to endure the psychological, political, and financial strain of downsizing

- Charger network

- Speed to market - how many other manufacturers could have achieved the speed at which Tesla has delivered the Model 3 (from inception to volume) or the Shanghai factory ?

- Diversification through the Energy and Storage Sector (I know bears see this as a weakness)

- Tesla's almost zero marketing budget

Taken in turn all of the above will be difficult to copy. In my opinion, together they represent an almost insurmountable challenge.

Every company covered by SCVR faces competition but I think Tesla is particularly well placed in this regard. I think the worst case scenario is Tesla holds it's own.

jwebster

27th Oct '19

"Because I still expect competition to be extremely tough in this sector, I still believe that this will make for a terrific shorting opportunity some day,"

Interesting to look at what the world's largest car producer, Toyota, is doing, namely small EVs for urban trips:

https://www.toyota-europe.com/world-of-toyota/feel/environment/better-air/electric-vehicle

"...we will be launching more than 10 battery electric vehicle models by the early 2020s. Our first target market will be China, after which we expect to roll them out to customers in Japan, India, the United States and Europe.

Our battery electric vehicles will help to sell more than 5.5 million electrified vehicles each year by around 2030.

Where our hybrid electric, plug-in hybrid electric and fuel cell electric vehicles are ideal for longer journeys, battery electric vehicles are best suited to short, low-speed journeys in towns and cities. Compact, zero-emissions vehicles powered by batteries that are quick to recharge can improve air quality and ease traffic congestion. They are quiet, easy to drive and have low running costs, making them perfect for commuting journeys or as delivery vehicles."

So I would expect the mainstream consumer market to be eventually owned by the big players who produce at scale. Tesla will compete in the high end market against BMW et al as a branded luxury vehicle.

For example, as reported in FT.com on their China launch. "The high price of a Tesla car is an additional hurdle. Locally-made Model 3s are expected to sell for about $47,000. Rival runabouts sell for half that price."

Interestingly, the market cap of Tesla and BMW is about the same, around £40B. Although Tesla's sales are £19B while BMW has £85B.

Not saying I'd buy BMW over Tesla, rather Tesla will eventually have a right-sized market cap, once it settles into it's niche.

24th Dec '19

I am a longstanding $tsla holder here are my thoughts on competition (a re-hash of my previous SCVR post which was posted a few days late)

As for shareprice/valuation I'm not saying anything although I have a positive long term view. Most companies represent a good shorting opportunity at some point but it's hard to discern when

On competition

7 years after the Model S was launched, if we waved a magic wand today and planted a Model S, X and 3 equivalent in the ranges of every competitor, and then restarted the race, I wonder how rivals would replicate the following Tesla 'non-EV' competitive advantages :-

- Software including autopilot. The US leads the world in software so it's no surprise that Tesla leads on connected car and autopilot

- Absence of dealer network with resulting direct increase to Tesla margin as well as indirect (through the removal of dealer stock and resulting working capital efficiencies)

- Young, cool, anti-establishment brand - If/when autopilot becomes ubiquitous one impact could be significantly reduced global sales and over capacity (in the west). Tesla has a relatively low manufacturing footprint and is better placed than rivals who would have to endure the psychological, political, and financial strain of downsizing

- Charger network

- Speed to market - how many other manufacturers could have achieved the speed at which Tesla has delivered the Model 3 (from inception to volume) or the Shanghai factory ?

- Diversification through the Energy and Storage Sector (I know bears see this as a weakness)

- Tesla's almost zero marketing budget

Taken in turn all of the above will be difficult to copy. In my opinion, together they represent an almost insurmountable challenge.

Every company covered by SCVR faces competition but I think Tesla is particularly well placed in this regard. I think the worst case scenario is Tesla holds it's own.

Small Cap Value Report (Thur 24 Oct 2019) - TSLA, PCF, DIS, SOLI, SHOE

Tesla ($TSLA)

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Graham Neary

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