Why Is Tesla Raising A Billion Dollars In Fresh Capital?

Tesla Motors, Inc. TSLA announced plans to raise around $1.1 billion through a combination of share and senior notes offering, just before initiating the pre-production of its Model 3 sedan. The company will utilize the funds to strengthen its balance sheet and reduce risks associated with the rapid expansion of business. The remaining proceeds will be used for general corporate purposes.

The electric automaker will be offering shares worth roughly $250 million and convertible senior notes valued $750 million. The notes are due to mature in 2022. Tesla CEO, Elon Musk, intends to purchase 96,900 shares worth $25 million himself.

Tesla unveiled the Model 3 sedan in Mar 2016. The vehicle will be the company’s first affordable electric car for the mass market, costing almost half as much as Model S. Notably, Model 3 is a four-door, five-seat electric sedan with a range of 215 miles per charge and acceleration of 0–60 mph in less than 6 seconds. Vehicle production and deliveries are expected in the second half of 2017. The company aims to steadily increase production to exceed 5,000 units per week in the fourth quarter of 2017 and 10,000 vehicles per week in 2018.

Prior to this offering, Tesla had raised $1.7 billion via a public offering of shares in May 2016. The capital was used to finance the accelerated production plan for Model 3 as well as to ramp up annual production volume to 500,000 units by 2018 and 1 million units by 2020.

Tesla had cash and cash equivalents of $3.39 billion as of Dec 31, 2016. However, the cash balance mostly represents cash generated from its May offering, the SolarCity acquisition and drawings on its credit facilities. Meanwhile, the company saw cash outflow in 2016. The company projected capital expenditures of around $2–$2.5 billion for the first half of 2017, implying limited cash balance before the Model 3 production scheduled for the second half of the year. The company’s need for capital had been anticipated last year and increased significantly post the guidance.

Price Performance

Tesla has outperformed the Zacks categorized Auto Manufacturers-Domestic industry over the last three months. During the period, Tesla gained 28.7% while the industry witnessed a 7.9% rise.

Zacks Rank & Key Picks

Tesla currently carries a Zacks Rank #3 (Hold).

Better-ranked companies in the auto space include American Axle & Manufacturing Holdings, Inc. AXL, Lear Corporation LEA and Honda Motor Co., Ltd HMC. While Lear sports a Zacks Rank #1 (Strong Buy), Honda and American Axle carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For the current year, American Axle, Lear and Honda expect earnings growth of around 8.1%, 8.9% and 26%, respectively.

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