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F looks like a HY, TSLA looks like an automaker

24 October 2019 by jbchevrel

When we came in, Ford Motor Co (F) was the worst performing CDS in CDX today, wider +11bp, on soft results (between London close and NY close). After that the CDS came back to unchanged, so broadly in line with the CDX. F has cut its full-year forecast by $0.5b due to higher warranty costs, high incentive spending in North America and lower China sales. In q3, North American profit margins also came down, partly due to plunging sales of Explorer. F outlook for 2019 EBIT is now [$6.5b, $7b] from [$7b,$7.5b] announced on July 24 and vs the $7b it had effectively reported in 2018. That is another sign that the restructuring will take more time before materialising. Rating-wise, that’s another step making S&P closer to pressing the trigger. S&P indeed assigned F a negative outlook back in July 18 (rat: weakness in overseas units, its ongoing restructuring). As the outlook applies to a 12-24 month period, it may well result in an effective grade cut from BBB to BBB-. Fitch may well follow. Back in Sept, Moody's had downgraded F to Ba1 from Baa3. We could see an exclusion of F’s bonds from the IG indices in 2020. Risks to this scenario include additional synergies with VW. Tesla, Inc. (TSLA) however, wowed the markets overnight. Its 5y CDS is tighter by -40bp to less than 350bp. At the beginning of June, it was trading north 700bp. But this time seems to be over. TSLA was profitable in Q3. No growth, but cost control. TSLA now simply looks like an automaker. Which, in the short term at least, is good news for credit. Revenue (total & auto) declined -7.6% & -12.2% oya and -0.7% & -0.4% oqa. They printed a lower top line. But auto gross margin ex-credits came in at 20.8% vs consensus 18.3% vs Q2 17.2%. The bulk of this seems to be have been driven by (material and general) costs reduction. D&A moved $50m lower oqa (~0.8% total gross margin). TSLA also mentioned Smart Summon was a $30m benefit (~0.6% total gross margin). FCF of $371m was better than the burn that some analysts had forecast and clearly better than the consensus too (+$72m). Catalysts on the name remain (1) delivery announcements (2) product and feature introductions (solar tiles, Class 8 truck and other product announcements/progress) (3) SEC and legal rulings. Further outperformance could be seen if (1) battery cost reductions prove to be better than expectations (2) TSLA demand and/or deliveries are higher than expectations (3) TSLA is able to sharply cut manufacturing costs (and vehicle price ++> to increase demand) (4) global industry demand (US, Europe, China) stronger than expected (5) positive regulatory changes.