NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week were items about Tesla's SEC filings and the jobs report.
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Something Fishy in Tesla's Warranty Reserves
Originally published on Friday, March 7, at 9:36 a.m. EDT.
Yesterday's "How I Shorted Tesla and Survived" described my short selling journey in
(TSLA - Get Report).
This morning I wanted to do a deeper dive on some recent SEC
filings at Tesla -- namely the Nov. 8, 2013 Form 10-Q (quarterly report) and the Feb. 26, 2014 Form 10-K (annual report).
Tesla's accounting has long been controversial.
In a prior post, I characterized Tesla's reported profits as EBBS (earnings before B.S.).
What got my attention this time at Tesla was the release of warranty reserves that provided a nonoperating, one-time $10.2 million boost to Tesla's most recent quarterly earnings.
For all of 2013 Tesla reduced it's warranty reserve nearly $2.1 million, a sharp reversal from the nearly $8.1 million increase
through the first three quarters of the year. In other words, in the fourth quarter alone, Tesla reduced its warranty reserve by a hefty $10.2 million, a gain that flowed directly into its income statement and boosted reported margins from 23.5% to 25% (exactly what Tesla had guided to) and earnings by an extra $0.07-$0.08 a share.
Given the early state of Tesla's automobile production cycle, it is highly unconventional and unclear to me why the company went from $8 million under accrual for prior year warranties for the nine-month period and then in the next quarter decide that it has actually over-accrued for the year by $2 million, serving to unwind the reserves (and then some, $2 million) from the first three quarters of the year.
In essence the question comes down to whether Tesla's warranty reserve release was used as a cookie jar to boost profits in the latest quarter, or did the company simply miscalculate its warranty calculations?
Tesla might make the case that its current warranty experience is coming in better than it previously expected (relative to its reserving), so it made this adjustment in the latest quarter. To this observer, however, considering how early it is in Tesla's production cycle, Tesla's warranty reserve release was aggressive accounting.
Another argument that I have heard (when I approached some knowledgeable friends on this subject) was that the reserve release occurred because the pricing of Tesla's used cars is higher than most had expected, but this shouldn't impact warranty reserves as a warranty is a guarantee that a company will replace or fix a defective item it sells to a customer. This doesn't have, as I understand, anything to do with the value of the car. (Note: You can calculate a warranty reserve liability and record it in your accounting records to reflect the amount you expect to pay for warranties in the future. You must record a warranty expense in the accounting period during which you sold the items and create a liability for the same amount. You can reduce or draw down your warranty liability account in the future when you perform warranty service.)
Regardless of the interpretation of the warranty reversal, Tesla got a consequential and one-time boost from an accounting change. Without this change, Tesla would have missed consensus earnings forecasts right before a $2 billion capital raise was deployed.
This morning's critical view of Tesla's quality of earnings doesn't change the broader debate on Tesla as an investment, but Tesla's nosebleed valuation and share price have such a high P/E multiplier attached that these should not be impervious or not influenced by the aforementioned accounting hieroglyphics.
I remain short Tesla.At the time of original publication, Kass was short TSLA.
Jobs, Jobs, Jobs!
Originally published on Friday, March 7, at 9:15 a.m. EDT.
Payrolls rose by 175,000 in February, 25,000 more than expected, while the private sector added 162,000, 17,000 above the estimate. The net revisions to the two prior months were up by a total of 25,000. The household survey measured an increase of just 42,000, but due to a 264,000-person increase in the size of the labor force, the unemployment rate ticked up to 6.7% from 6.6%. The labor force increase over the past two months is 787,000 with some noise related to the end of extended unemployment benefits. The all-in U6 rate, though, did drop to 12.6% from 12.7%. The participation rate held steady at 63%. A 0.4% month-over-month increase in average hourly earnings was a definite positive within the number for workers, twice expectations and brings the year-over-year gain to 2.2%. With a 6% year-over-year increase in commodity prices and 3% gains in rents, an increase in wages is what consumers could use, but of course that creates issues for the Fed
Notwithstanding weather, construction jobs rose by 15,000, and manufacturing was up by 6,000. The BLS said 601,000 had a job but was not at work due to weather, the second-highest going back 10 years, which was likely the reason for weekly hours worked falling to 34.2 from 34.3, the lowest since January 2011.
Bottom line: The winter months of December through February averaged 129,000 jobs compared with 230,000 in the same months last winter, thus pointing to the weather impact, but there are no more excuses going forward, and hopefully we'll get a snapback. That said, the inflation component of higher wages, combined with higher commodity prices is something that bonds should start paying attention to, and the 10-year yield at 2.80% is the highest since mid-January.
I had previously made the case that I would rather be short bonds than long stocks.
In support of that view and in response to the jobs report, this morning the ProShares UltraShort 20+ Year Treasury
is up 2% and the S&P
futures are up only 0.5%
Today's report is quite supportive of my short bond position.
From my perch, bond yields are now in a multiyear uptrend.
As to the U.S. stock market, today's better than expected jobs number might have been materially discounted.
At the time of original publication, Kass was long TBT and short SPY.