Car crash

“The delightful Mr Musk is a fine exponent of the “sell the sizzle, not the steak” school of thought. At the rarefied levels that Tesla inhabits in the popular imagination, there is no longer any need for the steak to exist.”

• FT subscriber, responding to the Tesla conference call of 2 May 2018.

Enron was still technically a going concern in April 2001 when that now notorious conference call took place. Richard Grubman of Highfields Capital asked the Enron CEO, Jeff Skilling, why the company was the only financial institution unable to provide its shareholders with either a balance sheet or cash flow statement with its earnings. Skilling’s response was somewhat unorthodox:

You, you, you.. Well, uh.. thank you very much. We appreciate it.

Skilling then went on to call the analyst an a**hole. The subsequent behaviour of Enron’s share price is shown in the chart below (hat-tip to Twitter’s @pierpont_morgan).

Source: Bloomberg

Lightning would appear to have struck twice. Last week, during a conference call between Tesla and Wall Street analysts that the FT coyly described as “fractious”, Elon Musk interrupted a question about the company’s capital spending by saying,

Excuse me. Next. Next. Next. Boring bonehead questions are not cool. Next.

Before the next analyst had finished asking his own question, Mr Musk interrupted again, and the next 20 minutes of the conference call were diverted to questions from a blogger named Galileo Russell instead.

Over on Twitter, a crowd listening with growing disbelief could identify a car crash when they heard one. @TeslaCharts (“Charting the poster child of ZIRP absurdity. Catnip for TSLA bears. Not investment advice. Disclosure: Short TSLA via put options”) was less than forgiving in his summary of the situation:

Micro:
Record net loss
EBITDA negative
CFO negative
Accounts payable up
Accrued liabilities up
Big debts coming due
Cash down
Bonds teetering
Event risk rising

Macro:
Rising rates
Fed tightening
Volatility up
Markets rolling over
Valuations still stretched.

Apart from that, though, everything seems peachy in Teslaland. In one sequence in the film Groundhog Day, TV weatherman Phil Connors (Bill Murray) hijacks the titular groundhog and drives his truck over a cliff. After an interminable fall, the truck crashes to the ground. “He might be okay,” comments his cameraman, still filming. Whereupon the truck explodes in a fireball. “Well, no probably not now.”

We offer no opinion on Tesla stock. Readers are perfectly capable of drawing their own conclusions. But the market expressed its own opinion, and the shares fell 5% in the after-market.

Two weeks ago we highlighted the characteristics of many successful CEOs of listed businesses, among them, Henry Singleton of Teledyne, who features in William Thorndike’s excellent study, The Outsiders:

Singleton.. ran a very unusual conglomerate. Long before it became popular, he aggressively repurchased his stock, eventually buying in over 90 percent of Teledyne’s shares; he avoided dividends, emphasized cash flow over reported earnings, ran a famously decentralized organization, and never split the company’s stock, which for much of the 1970s and 1980s was the highest priced on the New York Stock Exchange (NYSE). He was known as “the Sphinx” for his reluctance to speak with either analysts or journalists, and he never once appeared on the cover of Fortune magazine..

..The inhabitants of what Thorndike refers to as the intellectual village of Singletonville all understood, amongst other things, that:

• Capital allocation is a CEO’s most important job.
• What counts in the long run is the increase in per share value, not overall growth or size.
• Cash flow, not reported earnings, is what determines long term value.
• Decentralized organizations release entrepreneurial energy and keep both costs and “rancour” down.
• Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
• Sometimes the best investment opportunity is your own stock.
• With acquisitions, patience is a virtue . . . as is occasional boldness.

Henry Singleton outperformed the S&P 500 stock index by over 12 times over a 28 year period that incorporated several protracted bear markets. Henry Singleton never once appeared on the cover of Fortune magazine. Fortune, on the other hand, chose to make Elon Musk their 2013 Business Person of the Year. Go figure. [Emphasis ours.]

Aggressively playing to the media gallery whilst giving Wall Street analysts short shrift need not automatically signal the imminent implosion of your business. But the precedent of Enron and Jeff Skilling is not a wholesome omen. Now that US interest rates are finally on the rise – 2 year notes now yield 2.5%, versus just 0.5% two years ago – the writing may be on the wall for what @TeslaCharts calls “ZIRP absurdities”. If the long-overdue normalisation of interest rates brings a degree of sanity back to the financial markets, so much the better.