March 11, 2014

Doug Kass on Tesla Accounting EBBS

Tesla's accounting has long been controversial. In a prior post, I characterized Tesla's reported profits as EBBS (earnings before B.S.).

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.

What got my attention this time at Tesla was the release of warranty reserves that provided a non-operating, one-time $10.2 million boost to Tesla's most recent quarterly earnings. 

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.