← Back to portfolio

Q2 Earnings Messaging & Media Audit

Published on

Q2 Earnings Messaging & Media Audit

Overview:

As companies begin reporting Q2 earnings -- including Tesla and NextEra Energy -- we’re seeing mixed results across the board. Tesla experienced a sizable loss (though better than its Q1 earnings results), and analysts say this is due to falling demand for its more expensive and profitable vehicles as well as its solar energy products. However demand for its energy storage products -- the Powerwall and Powerpack -- increased during Q2. Meanwhile, NextEra Energy beat analysts’ estimates. Last year, it was the biggest power generator from solar and wind globally, and its continued growth has prompted the company to announce its plans to increase its renewables and storage portfolio to 30 GW by 2022 (from 18 GW today). Although NRG Energy will announce its earnings on August 7th, it has experienced a loss of -20.29% in its stock price over the last 52 weeks, and has announced notable investments in natural gas and renewables over the period.

In the broader technology market, although there are many companies still left to report earnings, some major players such as Amazon have seen weaker-than-expected earnings, while others, like Alphabet, have beat expectations. Overall, falling business investments kept a lid on Q2 growth across the board. Additionally, the trade war between the U.S. and China is expected to impact global economic growth more than previously expected, particularly by deteriorating global demand for oil, which in turn, is expected to dictate the direction of energy stocks and dull prospects for energy demand. The full extent of the trade war with China is yet to be seen; however, the common conception is that a deeper global economic downturn is imminent. Adding to unstable grounds is the uncertainty of the solar energy sector, as large players in the space such as ABB, KACO New Energy and Schneider Electric have recently sold off their solar inverter businesses. Demand for the cheap natural gas that’s liquidized and exported out of the U.S. is increasing globally, including from regions such as Asia, South Korea and Latin America.

Tesla

Summary: Despite having a rosier outlook than its Q1 report, Tesla's stock took a nosedive after it posted another sizable loss (CNET, Kyle Hyatt). Across the board, the company is losing its standing as analysts start to question whether they will ever become profitable. In addition to the personal SEC crisis that Musk is dealing with following a reckless tweet, the company has experienced numerous key executive exits which has resulted in unstable leadership. Another big problem for the company is that demand for its more expensive, and more profitable, Model S luxury sedan and Model X sport utility vehicle has fallen sharply this year (New York Times, Neal E. Boudette).

However, at an overall loss of $408m, the second quarter losses were an improvement over an unexpectedly large loss of $702m reported in quarter one. Tesla’s revenue climbed 47% from the same time last year to $5.2b. The company also generated $614m in cash during the quarter. Still, analysts say the earnings are concerning. Especially considering their 2019 capex is expected to be about $1.5 to $2.0 billion, a reduction from prior guidance (The Guardian, Kari Paul).

The losses come despite Tesla previously reporting it delivered a record-breaking 95,356 vehicles and produced a record 87,048 vehicles, but analysts noted selling cars may not necessarily lead to profit. Former and current Tesla employees said they were forced to take shortcuts to meet these aggressive production goals (The Guardian, Kari Paul).

Also noteworthy is Tesla's report that it has been able to sell off the bulk of its on-hand Models S and X, such that it now has just 18 days worth of inventory for those vehicles if sales rates stay what they are now (CNET, Kyle Hyatt).

The company blamed a decline in the average sales price of its vehicles during the second quarter on the roll out of its Model 3 Standard Range Plus, and sales of inventory Model S and Model X vehicles that lacked an upgraded powertrain, which gives the cars the ability to drive further on a single charge.

However, Tesla reported that the average sale price of its Model 3s in North America remained at $50,000, the same level as in late April, when the company delivered its first-quarter results (CNBC, Christine Wang).

Renewables: While sales of Tesla’s energy storage products — the Powerwall and Powerpack — increased during the second quarter, sales of its solar energy products declined. Tesla combines these into a single line item, and said they generated $368.2 million in revenue from energy generation and storage products in the second quarter, a 2% decline over the same period last year (CNBC, Christine Wang).

Tesla’s Powerwalls are now installed at more than 50,000 sites, the company revealed. These are its home energy storage batteries, meant to drive the adoption of renewable energy at home. However, Tesla notes, “Solar retrofit deployments declined sequentially to 29 MW. We are in the process of improving many aspects of this business to increase deployments” (Tesla).

Key Quotes:

“Tesla struggles to fulfill its ambitious goals and promises on a long-term basis, and stumbles at logistical impediments despite huge advances in technology that keep consumers and investors interested,” said Alyssa Altman, a transportation lead at the digital consultancy Publicis Sapient. “To avoid a total car crash of the business in the next few years, Tesla needs to refocus its efforts from maintaining the appearance of a profitable and sustainable business model to actually delivering one” (The Guardian, Kari Paul).

“Tesla’s 2019 delivery target of 360-400k will be closely watched, as well as any indications around the Q3/Q4 cadence. We think there’s still a fair amount of skepticism around Tesla achieving anything above the low-end of its delivery range,” Citi said in a note Monday. “So a confident reiteration perhaps with supportive commentary on the pace of July deliveries would probably be received well” (Yahoo Finance, Heidi Chung).

“This level of liquidity puts us in a comfortable position as we prepare to launch Model 3 production in China and Model Y production in the United States," Musk and Kirkhorn wrote (The Street, Jacob Sonenshine).

"We continue to find opportunities to improve capital efficiency and shift cash outflows to future periods," Musk and Kirkhorn wrote (The Street, Jacob Sonenshine).

“We believe our business has grown to the point of being self-funding,” the company said in a statement (New York Times, Neal Boudette).

Relevant Articles:

NRG Energy

(Q2 earnings will be released on August 7th)

Summary: After a stumble in the market that brought NRG to its low price for the period of the last 52 weeks, NRG Energy, Inc. was unable to take a rebound, for now settling with -20.29% of loss for the given period (News Heater, Nicola Day). Research analysts are predicting that NRG Energy, Inc. will report earnings of $1.82 per share when the firm issues their next quarterly report on Wednesday, August 7, 2019. NRG Energy, Inc. closed the last session at $34.94 and sees an average of 3,350,101 shares trade hands in each session. Looking further out, we can see that the stock has moved -14.53% over the past 12 weeks and -11.77% year to date (Gracemont Gazette, Staff).

The stated figure of NRG displays a quarterly performance of -14.29%, bringing six-month performance to -14.42% and year to date performance of -11.26% (News Smooth, Staff). The FCF Growth of NRG Energy, Inc. is 0.311225. The FCF Score of NRG Energy, Inc. is 0.734873. The Gross Margin Score of NRG Energy, Inc. is 3.00000. Currently, NRG Energy, Inc. has an FCF score of 0.734873 (Clayton Caller, Josh Clayton).

The rating they have provided for NRG stocks is “Hold” according to the report published on January 28, 2019. This price target implies potential upside of 36.35 percent over the next 12 months based on the current share price. Citigroup gave a “Buy” rating to NRG stocks, setting the target price at $45 in the report published on August 6, 2018. NRG Energy had some of the big losses among utilities recently with a drop of 2.4%. NRG Energy has been weak since its first-quarter earnings. The stock has lost almost 15% in the last three months. (Market Realist, Vineet Kulkarni)

Renewables: Their earnings have not yet been released, so we currently do not know how aggressive they will be in this market for the next quarter. For now, we do know that recently NRG Energy acquired Stream Energy's retail electricity and natural gas business for $300M. NRG expects the deal to increase its market share in Texas, Pennsylvania and a number of other markets in the eastern U.S. The company is the biggest seller of electricity in Texas, controlling more than 30% of the state's retail power market, a reach that will grow with the addition of Stream's 600K residential customers (Seeking Alpha, Carl Surran).

Additionally, Duke Energy Renewables will install NRG Systems’ Bat Deterrent System over a five-year period at 255 wind turbines at its Los Vientos III, IV and V wind sites beginning in July 2019. This will mark the first commercial deployment of the Bat Deterrent System in the continental U.S. (CSRWire).

Relevant Articles:

NextEra Energy

Summary: NextEra Energy continued its earnings growth streak in the second quarter by reporting an EPS of $2.35, which beat analysts’ consensus estimates for the quarter ending June 30. NextEra Energy’s large regulated operations in Florida and unmatched renewables portfolio bode well for long-term growth. Only halfway through 2019, they have signed nearly 4,100 megawatts of contracts for delivery beyond 2020, including roughly 900 megawatts for delivery in 2023, which is a reflection of the continued strong economic demand for wind, solar, and battery storage. Earlier this month NextEra Energy Transmission acquired Trans Bay Cable to further expand their rate of regulated and long-term contracted business operations (Market Realist, Vineet Kulkarni).

NextEra Energy's excellent performance through the first half of the year has it on track to produce adjusted earnings at or near the top of its $8 to $8.50-per-share guidance range. That implies that profits will increase by around 8% from last year's level. Meanwhile, the company expects its earnings to grow at a 6% to 8% annual pace through 2022. That growth rate supports the company's view that it can increase its dividend by 12% to 14% per year through at least 2020 (The Motley Fool, Matthew DiLallo).

Renewables: Last year, NextEra Energy was the biggest power generator from solar and wind globally. The company’s renewables and storage portfolio is 18 GW. The portfolio will likely increase to more than 30 GW by 2022. The company plans to invest approximately $13 billion per year in capital projects through 2022 (Market Realist, Vineet Kulkarni).

Since their last earnings call, they have added 94 megawatts of new wind projects, 828 megawatts of wind repowering projects and 744 megawatts of new solar projects to their renewables backlog. One of these solar projects will be paired with a 200 megawatt battery storage system, continuing their mission to pair low cost wind and solar energy with a low cost battery storage solution (Yahoo Finance, Staff).

They also built a transfer agreements for a 99 megawatt wind project and 75 megawatt solar projects which contributed to their 20% spike in growth this year which beat the utilities average of 16% (Yahoo Finance, Staff).

Key Quotes:

"NextEra Energy delivered strong second-quarter results and is well-positioned to meet our overall objectives for the year. We grew adjusted earnings per share by approximately 13% year-over-year, reflecting successful performance across all of the businesses" (Yahoo Finance, Staff).

“The company continues to capitalize on one of the best environments for renewables development in our history,’ according to Robo, which enabled it to secure more than 1,850 MW of new projects during the quarter” (Yahoo Finance, Staff).

“As I mentioned earlier, Energy Resources development team had another excellent quarter of origination success, adding more than 1,850 megawatts to our backlog” (Yahoo Finance, Staff).

Relevant Articles:

Additional notable trends

Falling Business Investment Leads to Decreased Growth and Slowed Economy

  • Jeffry Bartash from MarketWatch noted that U.S. GDP grew at a 2.1% annual pace from the start of April to the end of June, the government said Friday. However, a loss of momentum among business, especially exporters and manufacturers, suggest the economy could expand more slowly in the second half of the year, and falling business investment kept a lid on Q2 growth. According to Jeffry, the Federal Reserve is prepared to cut already low interest rates as soon as next week to give the economy a mostly symbolic boost.
  • Additionally, according to Reuters polls of more than 500 economists carried out between July 1 and 24, experts worry that the U.S.-China trade war will impact global economic growth more than previously expected, despite clear signals from many major central banks, including the Fed, that they would cut rates and ease monetary policies. More than 70 percent of 250 economists polled by Reuters now say a deeper global economic downturn is more likely, compared to around 50 percent in a similar poll in April.

Tension from China and Increased Demand for Natural Gas from the U.S.

  • Karen Hube of Barron’s addressed the International Energy Agency’s decision this month to dial back its growth estimates in global demand for the second consecutive quarter due to the prolonged trade war between the U.S. and China (which is particularly likely to dull prospects for energy demand, according to Myra Saefong of Barron’s).
  • Now the market also has to absorb increasing trade tensions with India, which imposed retaliatory tariffs on the U.S. over the weekend, a development that could further slow demand. As pressure mounts to reduce global carbon emissions and most nations have committed to fighting climate change, liquified natural gas is poised to benefit the U.S. as the most practical solution, especially as the U.S. continues to produce “some of the world’s cheapest natural gas” (Barron’s).
  • “We’re seeing demand for natural gas that’s liquidized and exported out of the U.S. and going all over the world—to Asia, South Korea, Latin America,” says Rob Thummel, managing director and senior portfolio manager of Tortoise Capital Advisors. “Increased U.S. liquefied-natural-gas exports to China are likely to be “one of the headlines when a final trade deal with China is reached,” added Thummel (Barron’s).
  • Additionally, cheaper gas prices “will boost coal-to-gas switching in the power sector and tighten U.S. balances, limiting supply available” to increase storage levels, predicts Richard Redash, head of global gas planning at S&P Global Platts (Barron’s).

Uncertain Future of Solar Energy

  • Travis Hoium of The Motley Fool wrote on July 20 that one of the biggest electricity infrastructure suppliers in the world is “throwing up its hands and giving up on solar energy.” ABB is unloading the solar inverter business, formerly known as Power-One, that it acquired in 2013 for $1.03 billion, which included $266 million in acquired cash. The company isn't just taking a loss on the deal; it's reportedly paying Fimer $470 million to take the business off its hands.
  • KACO New Energy sold its central inverter business to OCI Power and its string inverter business to Siemens earlier this year.
  • Schneider Electric said it's exiting the utility-scale solar inverter business in favor of a commercial and industrial platform it's building with Siemens. These are all big players in electric infrastructure, so their shifts in strategy are notable.
  • On the bright side, SolarEdge has arguably been the most successful in generating value because it became a favorite power optimizer supplier. From there, it has branched into products like inverters and energy storage. Despite the fact that power optimizers are starting to slip in market share, the company has benefited from growth in inverter sales, which hit 131,000 units in the first quarter. Travis notes that “very few companies have managed to generate long-term value in the solar industry,” and recent earnings of ABB show that “it's often those scrappy upstarts that you want to bet on in the solar industry.”

Declining Demand of Oil and Its Impact on Energy Stocks

  • Karen Hube of Barron’s also recently covered the ways in which recent fluxes in demand for oil are impacting energy stocks. According to Karen, experts are saying that deteriorating global demand could shape investment winners and losers in the energy sector.
  • For example, President Trump said during a cabinet meeting that “progress has been made” on negotiations with Iran over its nuclear program, spurring declines in oil prices and U.S. stocks, according to the Wall Street Journal.
  • Rob Thummel, managing director and senior portfolio manager of Tortoise Capital Advisors, told Barron’s that investors have to be selective within the energy sector. “Unfortunately, the direction of oil prices still dictates the direction of energy stocks,” he says. “Since the U.S. and China cut off trade discussions on May 17, the energy sector has been the worst performing sector in the S&P 500, down 5% or so.” However, he went on to say that “energy demand is going to increase—it has increased for 35 out of the last 36 years. Not many sectors can say this.”

There may be additional insights as more companies release their earnings.

Relevant Articles: