§ SolarCity changed the useful lives of their systems from 30 years to 35 years in the quarter, artificially (we believe) reducing depreciation expense, allowing the company to inorganically beat on EBIT and thus EPS.I like the fact the writer uses the legal code section symbol (silcrow: §) rather than bullet points or numbering.
We believe these actions are HIGHLY questionable...
SCTY $19.83 up a penny; TSLA $183.80 up 3 cents.
From Barron's Stocks to Watch:
After perusing SolarCity’s (SCTY) third-quarter 10-Q, Axiom Capital’s Gordon Johnson contends Tesla Motors (TSLA) investors either “lack a very basic understanding of the solar market, or…lack a very basic understanding of accounting.” He explains why:...MORE
While we previously pegged the odds of Tesla’s proposed merger of SolarCity at a 50/50 probability yes/no, we now peg those same odds at 70/30. However, with an 0.11x exchange of Tesla stock for each share of SolarCity, if the deal were to close today, SolarCity would be valued at $20.21/share, or 2.0% upside. However, were the deal not to close, we believe SolarCity’s stock would trade down to $6/share (we believe SolarCity is still creating negative value for each system sold on an unlevered basis. Thus, on valuation, applying 70% to $20.21 + 30% to $6, on arrives at a probability adjusted year-end 2016 price target of $16, or 20% downside.
So, despite advisory firm Institutional Shareholder Services’s (“ISS”) approval last week, why do we still see a 30% chance some shareholders “walk” on this deal when the date for approval (i.e., Thursday of this week) is so close, and the merger-arb spread has come in so much? In short, we assume investors aren’t willfully ignorant. What do we mean? Well, in SolarCity’s C3Q16 10-Q, which was released last week, we gleaned two key takeaways, including:...
See also Sunday's "Dear Uber: So You Want To Be In the Car Rental Business?".