Deutsche Bank Trims Tesla Estimate On Warranty Upgrade
Tesla Motors' (NASDAQ: TSLA) upgraded warranty on its Tesla S automobile drive train caused at least one analyst to shave nine percent off the company's 2014 earnings outlook Monday.
Tesla's Chief Executive Elon Musk announced the plan Friday, and Deutsche Bank's Rod Lache figures the move will cost the company $7.9 million. The upgrade is retroactive to cover all Model S cars previously produced.
But improving quality suggests Teslas' warranty accruals per unit "will likely decline" throughout 2015, despite the warranty upgrade.
Lache has a Buy rating on Tesla and $310 target and said he'd acquire shares "on any weakness associated with this story." Tesla gained 0.6 percent in pre-market trading Monday.
Musk said the drive trains are now covered for unlimited miles for eight years, matching the warranty offered on the company's battery packs. The previous warranty covered the drive train for for four years or 50,000 miles.
Musk said the upgrade "will have a moderately negative effect" on Tesla earnings in the short term. But "by doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident it will work out well in the long term," Musk added.
Lache said the action was likely a response to widely reported reviews by Edmunds and Consumer Reports that uncovered drive train issues that Lache believes will result in the recall of all of Tesla's 39,000 vehicles produced to date at a cost of $200 per vehicle or $7.9 million in total.
Both reviews were in general highly positive on the vehicle.
The fix will require installing a $2 zip tie to secure in place an existing wiring harness, Lache said.
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