A look at earnings reports by Tesla, Starbucks, and Boeing; The drama continues with the Boeing strike

It's earnings season, so let's take a look at three companies about which I've written recently...

1) First up, electric-car maker Tesla's (TSLA) stock soared 17% this morning after the company reported blowout third-quarter earnings after the close yesterday. (The full shareholder deck is here, and here's the Wall Street Journal's summary: Tesla Surprises Wall Street With Strong Third-Quarter Results.)

Year over year ("YOY"), revenue grew 8% thanks to 2% growth in automotive revenue (in spite of heavy discounting), a 52% jump in energy generation and storage revenue, and a 29% increase in "services and other revenue."

Meanwhile, gross margin increased YOY from 17.9% to 19.8% while operating expenses fell by 6%, resulting in operating income soaring by 54% as operating margin grew from 7.6% to 10.8%.

Adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") grew 24% YOY, though adjusted earnings per share ("EPS") only grew 9% due to a higher tax rate.

YOY, operating cash flow jumped 89% while capital expenditures rose 43%, resulting in free cash flow ("FCF") skyrocketing 223%, from $848 million to $2.7 billion.

For more on the earnings report, I checked in with my analyst Kevin DeCamp – a longtime Tesla bull – who told me in a private e-mail this morning:

After missing analyst earnings estimates for multiple quarters in a row, Tesla finally had a strong quarter with a solid beat.

Tesla has had a long run of decreasing gross margins over the last couple of years with big discounts to drive vehicle sales in a challenging macro environment with rising interest rates. The company has slowed price cuts this year, but incentivized sales with multiple low-rate offers that had analysts worried about margins. Today, investors are breathing a sigh of relief.

The higher gross margin, earnings beat, massive growth in its energy segment (accompanied by impressive 30% gross margins), and strong free cash flow are giving investors' confidence the worst may be behind Tesla and the stock is reacting positively.

Tesla's scale advantage is on full display this quarter as it relentlessly pushed the costs to produce each car to a record low of $35,100 vs. $36,800 just last quarter. This number was likely helped by positive gross margins on the Cybertruck for the first time, while most other EV makers are still struggling with negative margins. In addition, this radically designed "truck" (or monstrosity, depending on who you ask) moved up to the third best selling EV in the US, after the Tesla Model Y and 3.

But as Kevin asks, "where's the growth?"...

Shouldn't a car company trading at an $875 billion market cap have higher revenue growth than 8%?

Tesla has been telling Wall Street for a few quarters now that it is between two major growth waves: "the first one began with the global expansion of the Model 3/Y platform and we believe the next one will be initiated by advances in autonomy and the introduction of new products, including those built on our next generation vehicle platform."

I believe what long-term investors should really be focused on is that Tesla stopped the bleeding and is proving that it can navigate rough seas while easily funding its future growth plans. Tesla delivered strong free cash flow of $2.7 billion even while investing a record high – by far – of $3.5 billion on capital expenditures, ending the quarter with a war chest of $33.6 billion in cash and cash equivalents.

On the earnings call, Elon Musk gave guidance of 20% to 30% growth in vehicle volumes next year, a Tesla Semi production start in late 2025, Cybercab (robotaxi) volume production in 2026, and many other ambitious goals that may or may not happen.

And as he concludes:

Tesla may have the will and the talent to give it a decent shot at these plans, but I think this quarter proved that it will have the operating leverage and cash to fund these massive investments in energy, transport, robotics, and AI that are necessary to make the futuristic world showcased during the 10/10 "We Robot" event a reality.

A car company should never be trading at a $875 billion market cap, but it's much more than a car company. If you don't buy into Musk's vision, then you shouldn't own the stock. However, if he accomplishes his goals, then his prediction of Tesla becoming the most valuable company in the world ("probably by a long shot") will likely come true.

Thank you as always, Kevin!

So with all this in mind, why not pile into the stock after such a great quarter?

For starters, here are comments from one of my bearish friends:

I don't think there has been anything fundamentally new here except (1) They managed to lower costs of goods sold hugely this quarter out of the blue, and (2) They keep discounting like crazy (0% financing) to keep volumes flat.

Meanwhile, hundreds of new EVs globally keep entering the market and making the competitive landscape tougher by the day.

And the self-driving stuff is so laughably eight decimal points away from reality.

As my friend also notes:

Let's look at that $2.7 billion in free cash flow for a moment... $1.6 billion of that consisted of delaying paying their bills until after the quarter ended. That brings it down to $1.1 billion. Then, they drew down $0.4 billion in receivables, so now you're down to $0.7 billion net. But then you also had a $1.0 billion increase in deferred liabilities.

So now you really have a $0.3 billion net reduction in free cash, adjusted for items that will boomerang after quarter-end. So, adjusted for items that will boomerang after quarter-end, it wasn't really a good FCF number at all: negative $0.3 billion.

Additionally, as this slide from the earnings presentation shows, on five different metrics over the past three years, Tesla's numbers aren't impressive: vehicle deliveries are down 6% this year and FCF and net income last quarter were lower than the fourth quarter in 2021:

And finally, there's valuation...

At the recent price of around $250 per share and 3.5 billion shares outstanding, that gives the company a market cap of about $875 billion and, with $26 billion of net cash, an $849 billion enterprise value ("EV").

With trailing revenue and adjusted EBITDA of $97.2 billion and $15.7 billion, it's trading at 8.7 times EV/revenue and 54.1 times EV/EBITDA. And with $2.40 of trailing adjusted earnings per share, it has a price-to-earnings multiple of (I hope you're sitting down) 104 times.

To be clear, Tesla is a great company with open-ended opportunities in some of the world's largest end markets, so I wouldn't recommend shorting the stock... but it's also light years away from a price at which I would consider buying it.

So you're better off popping a bowl of popcorn, sitting back, and enjoying the show...

2) Up next, coffee giant Starbucks (SBUX) pre-reported dreadful fiscal fourth-quarter earnings after the close on Tuesday.

YOY, sales declined 3% to $9.1 billion (missing estimates of $9.4 billion), on a same-store sales drop of 7% (a drop of 6% in the U.S. and a drop of 14% in China).

EPS tumbled 25% YOY to $0.80, missing estimates of $1.03 by a mile. The company also suspended guidance. The only silver lining was that it raised its quarterly dividend by $0.04 to $0.61 a share (a 2.5% yield).

Normally when a company misses its numbers so badly and suspends guidance – especially when it's trading at a rich valuation of 29.5 times trailing earnings – the stock would be down at least 10%... if not 20%.

But SBUX shares opened down 3% yesterday, and actually ended the day up nearly 1%.

What could possibly explain this? I think there are three primary reasons...

First, Starbucks is an incredible brand and company, and therefore, even with its current troubles, deserves a premium multiple.

As I mentioned in my August 14 e-mail regarding the company's respectable business:

I'll also note that in our flagship Stansberry's Investment Advisory newsletter, we've long-respected Starbucks' business and have been writing about it since 2008...

It's a classic example of what we call a "capital efficient" business – the kind of business that can grow without having to make significant corresponding capital investments. Capital-efficient businesses like Starbucks – and McDonald's (MCD), Hershey (HSY), and Microsoft (MSFT) – are the source of many of our best-performing long-term recommendations.

And as I continued:

In fact, the Investment Advisory team had recommended buying shares of Starbucks back in October 2018. Earlier this year, the position in the model portfolio triggered its 25% trailing stop after the company released a disappointing second-quarter earnings report.

We closed the Starbucks position and booked a 52% gain... but as we noted in the May Investment Advisory monthly issue:

We still like the company's long-term prospects and may add it back to our portfolio in the future when the time is right. But for now, we're protecting our capital and locking in a solid gain.

As for the second reason for the muted reaction to the poor earnings report, investors correctly recognize that the company was poorly managed and underearning under the prior CEO, Laxman Narasimhan.

And lastly, investors (correctly again, I think) have great confidence in the new CEO Starbucks recently poached from Chipotle Mexican Grill (CMG), Brian Niccol, and view this as a classic "kitchen sink" quarter.

This Heard on the Street column in yesterday's WSJ also has some insightful commentary: 'Back to Starbucks' Could Have a Retro Feel – and Valuation. Excerpt:

If Niccol's hapless predecessor Laxman Narasimhan were still in charge, the market reaction would have been thermonuclear, probably sending the stock to multiyear lows. Yet, even with the chain worth $22.5 billion or 25% more than the day he was appointed in August, shareholders appear to be giving Niccol the benefit of the doubt. Part of that has to do with his pedigree at Chipotle and at Yum Brands before that. But a lot of credit goes to the radical simplicity of his message: "Back to Starbucks."

It is hard to glean a lot of detail from a slogan and a handful of generic action steps, and Niccol admitted that he still is figuring things out. There are some clues, though. He has suggested moving the emphasis from the hyperefficient, highly digital but impersonal experience of recent years at the chain to one more akin to the slower, welcoming "third place" originally conceived by three-time boss Howard Schultz: "A welcoming coffeehouse where people come together," according to a recorded statement to shareholders.

For additional insight, I'll repeat the comments from my old friend Lloyd Khaner of hedge fund Khaner Capital – which I also included in my August 14 e-mail, right after Starbucks announced Niccol's hiring.

I think his conclusion then still remains true today:

For my turnaround discipline, it's too soon.

You need to have a numbers reset. Starbucks has been under-earning, so earnings will be better a year or two from now.

I want to make sure he's a good cultural fit (that was the problem with the prior CEO, Laxman Narasimhan).

I'm less focused on the valuation and more on how he turns around operations. If he does so, I'm willing to pay up.

But this is going to take time. Normally I would say that this is a three-year turnaround, but maybe Niccol can do it in two.

3) Finally, aircraft maker Boeing (BA) reported another horrific quarter (here are links to the full earnings release, slide presentation, and 10-Q) yesterday morning...

The company lost $6.2 billion on a 1% YOY decline in revenue. Cash from operations was negative $1.345 billion and capital expenditures were $611 million, so FCF was negative $2 billion – a terrible number, but at least better than negative $3.9 billion in the first quarter and negative $4.4 billion in the second quarter.

As a result, net debt rose $1.9 billion during the quarter to a new all-time high of $47.2 billion. No wonder the company has filed to sell up to $25 billion in stock or debt, which I mentioned in my October 15 e-mail.

Going into the earnings report, investors' expectations were very low... so the stock only dipped about 2% yesterday.

Here's a WSJ article from yesterday with further details: Boeing Warns on Cash Burn, Awaits Strike Vote. Excerpt:

Executives said the company is likely to burn cash through the next three quarters, and turn cash-flow positive in the second half of 2025. The company burned through more than $10 billion in the first nine months of 2024.

On a call with analysts, Chief Executive Kelly Ortberg said it would take time to get production restarted even if the union votes to end the strike, and it is unclear how quickly Boeing will be able to reach its goal of producing 38 737 jets a month. Boeing also cannot extract itself from money-losing defense contracts, the new CEO said.

In a memo to staff, Ortberg said the company must repair a broken culture, shrink itself and improve execution on new plane varieties. The company had revealed a deep quarterly loss and plans to cut 17,000 jobs. Striking union members are voting Wednesday on a new contract proposal.

Adding to Boeing's misery, last night 64% of the 33,000 members of its machinists union voted to reject a deal that would have raised base wages by 35% over four years, along with other benefit and working condition enhancements.

As a result, the stock was down this morning. This new Barron's story has more details: Boeing Workers Reject a $23,000 Raise. What Comes Next. Excerpt:

With the strike ongoing, it's back to the negotiating table. Wage increases of 40% or 45% may be required to settle the strike...

Without workers, Boeing can't build and deliver planes. That leaves customers with less capacity than expected. It also means more uncertainty for Boeing suppliers...

Boeing's production rates have already been a problem this year. On Jan. 5, an emergency-door plug blew out of a 737 MAX 9 jet while in flight. That incident led to more regulatory oversight along with less production.

Through September, Boeing delivered 225 MAX jets, about 25 a month. Eventually, Boeing wants to build closer to 40 a month.

It's not clear to me that the union workers who vetoed this deal fully appreciate how perilous Boeing's situation is. But looking at the whole picture here, I feel even more strongly today that this is a stock to avoid.

Best regards,

Whitney

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