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Bram de Haas
Bram de Haas
Articles (439)  | Author's Website |

David Einhorn Is Riding the Tesla Short Hard

A review of Greenlight Capital's 1st-quarter letter

Greenlight Capital's David Einhorn (Trades, Portfolio) just released his first-quarter letter.

Even though Einhorn's performance has been really bad the last several years, I remain a devoted follower and love to read his letters to see what he thinks about the firm's positions. Greenlight posted an 11% return for the quarter, lagging the S&P by 2.6%. That's not great, but the firm is 112% long and 70% short, meaning its net exposure is only about half that of the S&P 500.

AerCap Holdings (NYSE:AER), Brighthouse Financial (NASDAQ:BHF), Deutsche Pfandbriefbank (PBB), General Motors (NYSE:GM) and Green Brick Partners (NASDAQ:GRBK) were the portfolio's best performers. On the short side, Einhorn finally made a bundle on Tesla (NASDAQ:TSLA).

He discussed two companies in depth.

Brighthouse Financial

Brighthouse is basically an insurer, but Einhorn contends its GAAP accounting is very difficult to understand.The company hedges its exposure to equity markets and to interest rate risks. With GAAP accounting, these get marked to market each quarter. Unfortunately, the liabilities they are effectively canceling out are not. In Einhorn's words:

"All else being equal, BHF benefits from rising equity markets and higher interest rates, as the economic gain from lower expected claims more than offsets the company’s losses on its hedges. However, the company’s GAAP accounting indicates the opposite; while the hedges generate mark-to-market losses, there is not a corresponding reduction in GAAP liabilities. As a result, when markets rose in the first part of 2018, BHF’s GAAP results showed losses and book value declined."

But in reality, the company became more valuable. Einhorn believes the fourth-quarter results are going to clear up this issue. Brighthouse plans to repurchase $1.5 billion worth of stock by the end of 2021, which is one-third of its market capitalization in three years. In other words, an over 10% buyback yield over the next three years. Einhorn continues to like the stock at current levels:

"We believe they remain considerably undervalued at around 4 times 2019 adjusted earnings and 30% of year-end book value."


In his letter, Einhorn seems pretty worked up about Tesla. It reminds me of his work on Allied Capital. He started off by telling the horrid story of Tesla victims:

"On February 24, a man driving in Davie, Florida, was tragically killed inside his Model S after hitting a tree, his front driver-side wheel severed from the wreck. The car battery caught fire, and neither the driver nor first responders could open the doors, which were locked shut with the door handles retracted..."

Tesla touts its cars as the safest around because they perform well in crash tests, but, according to Einhorn, their practical safety is much lower because of these sorts of events:

"The fatality rate for TSLA drivers is much higher than it is for other luxury cars. We recall the public concern when a handful of Samsung Galaxy phones spontaneously combusted in 2016. By way of comparison, a few people suffered burns, and there were no fatalities. Nevertheless, this led to a recall of millions of phones and a variety of new safetyrules. When Uber had a single fatality in its self-driving program in 2018, it suspended the program for nine months only to resume it with enhanced safety protocols. Recently, GM (NYSE:GM), Ford (NYSE:F) and Toyota (NYSE:TM) announced a consortium to establish safety rules for development, testing and deployment of autonomous vehicles. TSLA was notably absent from that group and continues to use its customers and other motorists, bikers and pedestrians sharing the roads with distracted or sleeping Tesla drivers as guinea pigs."

Einhorn isn't just worked up about the safety of Tesla vehicles. He doesn't think its operations are running smoothly either. In the letter, Einhorn pointed out that U.S. sales for the Model 3 fell about 66% in March on a sequential basis.

The guru sees total annual global demand for 200,000 Model 3s. Meanwhile, he believes demand for Tesla’s high-end Model S and Model X have fallen in a big way. The company is trying to fix this with price cuts, but it doesn't seem to be working. Einhorn believes the automaker will go from making $2.5 billion in gross profit on the S and X to just $1 billion for 2019. Going forward, it doesn't look much better. He wrote:

"TSLA is still guiding to quarterly demand of about 100,000 to 115,000 cars for the balance of the year. We don’t see what can possibly drive that much demand. In fact, we suspect that without initial surge demand elsewhere, TSLA will struggle to even maintain first quarter unit volumes."

If sales come in this low, it will not just destroy the growth story. Einhorn also believes Tesla’s commitment to buy batteries from Panasonic could quickly spiral out of control. Einhorn thinks the firm needs to buy $3 billion of batteries from Panasonic (TSE:6752) this year. With not as much money coming in as expected and Tesla being on the hook for these contracts, Einhorn thinks the company is in deep trouble

"We believe that right here, right now, the company appears to again be on the brink. The signs are everywhere, from the lack of demand, desperate price cutting, layoffs, closing-and-then-not-closing stores, closing service centers, cutting capex, rushed product announcements and a new effort to distract investors from the demand problem with hyperbole over TSLA’s autonomous driving capabilities."

Einhorn is eager to update us on how this thesis plays out over the next quarter.

Largest positions

The largest disclosed long positions are AerCap Holdings, Brighthouse Financial, CONSOL Coal Resources (CCR), General Motors and Green Brick Partners (GBRK). Einhorn also has a large position in gold.

Disclosure: Author is long GM, short TSLA.

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About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

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