UBS Still Selling Tesla

• Tesla Motors Inc TSLA shares are down 6 percent year-to-date, declining in October after having climbed from end-March through July.
• UBS analyst Colin Langan maintained a Sell rating on the company, with a price target of $190.
• While the company’s Q4 delivery guidance appears aggressive, the margin guidance is disappointing, Langan stated.

Tesla reported its 3Q non-GAAP EPS at a loss of $0.58 per share, slightly better than the consensus expectations of a loss per share of $0.60. Analyst Colin Langan pointed out, however, that the beat was mostly driven by R&D of $155 million being below the consensus of $171 million.

Tesla projected 17k-19k in Q4 deliveries and maintained its guidance of 1.6k-1.8k deliveries per week in FY16. “Delivery targets are dependent on the timing of the Model X ramp…We see this ramp up as aggressive given persistent production challenges (seating, door seals, etc.) that are still not fully resolved,” Langan wrote.

The company’s gross margin contracted in 3Q by 430bps, probably due to the $8k y/y decline in Model S pricing. Since Model X deliveries commence with the $132k signature version, expectations were for mix to result in margin expansion. Tesla has, however, projected sequential margin contraction.

In the report UBS noted, “Margins are expected to improve as the Model X ramps, though production mix will be an underlying headwind as the next versions will be lower priced. We also question TSLA's long-term forecasted demand for Model S & X (both at 100k/year) given the comparable BMW 7-Series sells about 65k/year.”

The EPS estimates for 2015, 2016 and 2017 have been reduced from -$0.70 to -$1.10, from $2 to $1.50, and from $1 to $0.75, respectively, to reflect lower auto margins.