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Tesla gains ‘investment grade’ rating at S&P following strong YTD ’22

Credit: Tesla

Tesla (NASDAQ: TSLA) gained its “investment grade” rating from the S&P today, moving from BB+ to BBB, based on the company’s strong performance in 2022 so far.

Tesla gained the BBB rating on Thursday, officially moving out of the “Junk” category and into “Investment Grade,” which is considered “from best quality to good quality but somewhat vulnerable to changing economic conditions,” according to Thompson-Reuters Practical Law.

“Tesla Inc.’s reported production and deliveries for the nine months ended Sept. 30, 2022, were higher than our expectations and the ramp-up in its global capacity appears on track to meet the strong demand for its products into 2023,” the report said. “We now view Tesla’s credit profile more favorably because it continues to demonstrate market leadership in electric vehicles (EVs), with solid manufacturing effeiceny that supports strong EBITDA margins and sustained positive free operating cash flow (FOCF), above our previously established upside triggers.”

S&P also stated it now expects Tesla to sell 2 million units in 2023, up from its previous outlook of just 1.5 million units, which it could technically reach in 2022. “This will help sustain its solid market share within EVs amid intensifying competition and aggressive launches by automakers globally, particularly in China and Europe.”

Tesla’s financials, including sustainable free cash flow, have triggered the S&P to increase its rating of the automaker. “In 2022 and 2023, we expected Tesla to sustain FOCF to sales of over 10%, compared with our prior upside trigger of 2%, backed by industry-leading EBITDA margins of roughly 20%, compared with our upside trigger of 18% and well above our 10% threshold for above average automakers.”

The S&P holds the right to upgrade or downgrade any company at any time, and it listed potential scenarios for both regarding Tesla:

“We could lower our ratings if:

  • Tesla adopts a more aggressive financial policy with respect to shareholder distributions, growth of its captive finance operations or other business segments, and acquisitions, such that financial cushion reduces materially; or
  • It cannot sustain solid FOCF due to slowing growth or higher-than-expected spending

We could raise our ratings if:

  • Tesla sustains its first-mover advantage as EV demand expands and competition intensifies such that its global light vehicle market share appears likely to exceed 5%;
  • It appears likely to sustain its recent track record of free cash flow beyond 2024′ and
  • It remains committed to a prudent financial policy in line with a higher rating.”

The S&P stated it currently projects Tesla at around 1.5 percent market share globally in terms of the light vehicle market, which is estimated to be roughly 80 million cars this year.

Tesla has been upgraded several times since 2019 but has not been able to shed the “Junk” category until today. Its most recent upgrade before today was in April when it was moved to BB+ based on the company’s Q1 results which “indicated solid execution and prospects for robust free cash flow in 2022 amid supply disruptions,” the organization wrote in a bulletin.

Disclosure: Joey Klender is a TSLA Shareholder.

I’d love to hear from you! If you have any comments, concerns, or questions, please email me at joey@teslarati.com. You can also reach me on Twitter @KlenderJoey, or if you have news tips, you can email us at tips@teslarati.com.

Quotes from S&P provided by StreetInsider.

Tesla gains ‘investment grade’ rating at S&P following strong YTD ’22
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