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This Could Be Why Tesla Was Excluded From the S&P 500

GuruFocus.com

- By Jacob Wolinsky

There was quite a bit of talk about Tesla (NASDAQ:TSLA) stock being excluded from the S&P 500 when the committee did its quarterly rebalancing. However, the committee didn't explain why it excluded the stock. As a result, we are left speculating about the reasons.

Bulls don't expect Tesla stock to be excluded from S&P 500 forever


In a note, Wedbush analyst Daniel Ives noted that it was generally a consensus view that Tesla would be added to the index. He suggested that the "profitability metrics and forecast" may have kept the electric vehicle maker out of the index this time around.

Tesla posted its fourth quarter of profits, checking the last box on the list of official requirements for inclusion in the index, but its exclusion suggests the committee is looking for more. In his own note about the decision, Baird analyst Ben Kallo said Tesla shares had generally priced in the inclusion in the index after the company's second-quarter GAAP profits.

He believes the stock will eventually be added to the index and that Friday's exclusion was merely a delay. He didn't offer any suggestions on why Tesla was excluded from the S&P 500 this time around.

Einhorn may have had a clue about why Tesla stock was excluded from the S&P 500

While analysts aren't really offering many satisfactory reasons for why Tesla was excluded from the S&P, David Einhorn (Trades, Portfolio) of Greenlight Capital made some comments in his second-quarter letter that deserve a review. He pointed out some issues with the automaker's quarterly earnings reports and profitability, which could be why it was excluded from the S&P 500.

He noted that in both the first and second quarters, Tesla significantly increased its recognition of regulatory credits. For the first six months of the year, the automaker recognized $782 million in regulatory credits, compared to $594 million for all of 2019.

In the past, the company received cash for its regulatory credit sales, but this year, they have "piled up in accounts receivables." He also pointed out that Tesla's main customer and exclusive European customer is Fiat Chrysler (FCAU), but Tesla's recognition of those credits no longer is consistent with Fiat Chrysler's recognition of expenses for regulatory credits like it once was.

Manipulating eligibility?

Additionally, the increase in regulatory credits occurred while Tesla delivered a lot fewer cars in Europe during the first half of the year. Einhorn pointed out that without the over-accrual of sales of regulatory credits, the automaker' $120 million in GAAP earnings "would have surely been negative." He also questioned whether Tesla's accounting for those regulatory credits conforms to GAAP standards.

"We suspect that TSLA changed its accounting policy during a non-audited quarter to manipulate eligibility in the S&P 500 index," Einhorn alleged.

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This article first appeared on GuruFocus.