Proof that Tesla is already Aaa, by Moody's
And yes, they should be irrelevant! Let's help to make it happen.
Let’s get straight to the point: Yes, Moody’s finally upgraded Tesla Inc. to investment grade (Baa3, stable outlook), but only because the heat was on. I explain it in detail in Episode 33 of The Cyberbulls, you can jump right to it here.
Below is the most ridiculous part of the January 2023 Credit Opinion by Moody’s, which has yesterday been upgraded from Ba1 to Baa3.
This scorecard serves to calculate the rating and is based on the rating methodology for automobile manufacturers, which can be downloaded here. In both the backwards looking table (on the left) and the forward looking table (on the right), Tesla is already “A2”.
But then the overall score can be manually overwritten if the rating agency finds reasons to do so. You bet they did. See in the title above the chart: “Tesla’s reliance on a narrow - but expanding - product offering, accelerating competition from legacy automakers and new entrants, as well as corporate governance considerations”.
Let that sink in: the objective financial factors, Factor 2 and Factor 3, are already Aaa-level for all criteria for the “Last Twelve Months prior to 9/30/2022”.
So what are Factor 1 and Factor 4, for which the scoring model has lower results?
Factor 1 - Business Profile:
Trend in Global Unit Share over three years (10%)
A graph says more than a thousand words, and deserves fully a Aaa-rating in this category. Yet, Moody’s attributed to this factor a Baa-rating, in the sole goal to lower the overall calculation.
Market Position and Product Breath / Strength (30%)
Here Moody’s attributes a Ba-rating to Tesla. The definition for this rating level from the rating methodology is
Defensible competitive position focused on one of the four key global geographic regions; gaps/areas of weakness in the product portfolio exist with evidence of material variations in the rate of model renewal; earnings rely on specific products or segments or returns on key products cause periodic pressure. Emissions-reducing technologies and AFV product development may be somewhat lagging, but company has articulated a strategy and concrete plans to attain an industry-average market position in terms of customer acceptance; or investments to meet future regulatory standards are uneven, but company has reasonable leeway before delays will have a meaningful impact on ability to meet future regulatory standards.
This argument has been contradicted by the update release yesterday, where Moody’s states “Tesla will maintain its position as one of the leading manufacturers of battery electric vehicles, as the company further solidifies its global footprint. … Considerable investments in new vehicle and battery cell production facilities enable a steep increase in vehicle delivers. Tesla’s product offering is expanding, with early production of the Cybertruck slated for later this year. The development of a next generation vehicle at targeted 50% reduction in cost holds the prospect for a meaningful decrease in the reliance on the earning contributions of Model 3 and Model Y.
So, Moody’s, no doubt, this criteria Tesla deserves a Aa-rating already. (for definition of a Aa-rating in this category, please refer to the Methodology here)
Factor 4 - Financial Policy (10%)
For this factor, Moody’s attributed a Ba-rating to Tesla. The definition of a Ba-rating is
Expected to have financial policies (including risk and liquidity management) that tend to favor shareholders over creditors; above-average financial risk resulting from shareholder distributions, acquisitions, or other significant capital structure changes.
Moody’s notes in its report that Tesla continues to operate with low financial leverage, has very good liquidity with $22bn of cash and investments, and prospects for very considerable free cash flow.
The only two challenges mentioned in this factor are “considerable latitude exercised by CEO Elon Musk with notable key-man risk” and that Kimbal “has close ties with the CEO”.
To sum it up: In all objective measures, Moody’s understands very well that Tesla is already, by far, Aaa. In more subjective criteria, Moody’s disregard for Elon Musk shines through and the rating agency uses arbitrary means to knock the rating down.
At least we have the rating now in the investment grade zone. Climbing up the ladder will have to follow. The most important is that Tesla investors know the truth.