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Elon Musk's swift settlement with SEC a positive for Tesla but legal risks linger, analysts say

While the SEC lawsuit will recede among investor concerns, shareholder class action suits and a Justice Department investigation remain
Tesla showroom
Legal woes confronting Musk and the electric-car maker will not dissipate anytime soon, analysts say

The rapid settlement by Tesla Inc CEO Elon Musk of the lawsuit filed by the US Securities and Exchange Commission (SEC) accusing him of fraud should be a positive for the company and its shares, but the legal woes confronting Musk and the electric-car maker will not dissipate anytime soon, analysts said on Monday.

JP Morgan analyst Ryan Brinkman said in a research note Musk's settlement with the SEC is a positive relative to the situation Tesla found itself in after the SEC charges were initially brought last Thursday.

Brickman believes, though, that Tesla's legal risks remain elevated, given the "plethora of now potentially bolstered shareholder class actions and any potential Department of Justice investigation" into Musk's aborted plan to take the company private.

READ: Elon Musk and Tesla settle fraud charges with SEC, to pay $40M fine

The settlement only covers the lawsuit filed by the SEC since the Justice Department probe, which may result in criminal charges, is a separate matter.

Brinkman kept an Underweight rating on shares of Tesla. He said the news reduces uncertainty as to who will lead Tesla and avoids a distracting and potentially lengthy trial. The fine Tesla itself must pay is "only a modest incremental negative," he added.

Citi analyst Itay Michaeli said while the settlement adds a "much needed dose of stability," it doesn't mark the end of the substantial legal, regulatory, and reputational risks that Musk's "go-private saga" created.

Michaeli said while the focus should now shift to third quarter performance, he worries that the ramifications of last week's events might linger on broader sentiment.

Michaeli raised his price target on Tesla shares to $258 from $225 given the reduced risk from the SEC settlement, but he kept a Sell rating on the stock.

READ: Tesla short-sellers increase positions while longs get out after Musk is sued by the SEC, says S3 Partners

Analysts following the stock believe it will recover ground lost last week when the shares crumbled.

"The settlement should allow company focus to return to its core objectives — building quality cars and advancing sustainable transportation. Negative headlines and the SEC investigations contributed to significant volatility in shares and could have been an internal distraction for Tesla, in our opinion," Baird Equity Research senior analyst Ben Kallo and research associate David Katter wrote in a research note.

"We believe the resolution of the SEC lawsuit should allow the company’s focus to return to producing cars and enable investors to focus on fundamentals, which we think are strong," they added.

Baird reiterated an Outperform rating for Tesla. The analysts noted that improved corporate governance, including the appointment of an independent chairperson/directors and increased oversight of Musk’s twitter communications and his continued leadership will be viewed positively by the market. There are several upcoming catalysts (including 3Q deliveries this week) to potnetially drive shares higher.

Baird set a price target of $411 for Tesla shares.

Shares of Tesla rose 17% to trade at $309.50 Monday morning, continuing premarket gains. The shares closed Friday down 13.9% at $264.77 after news of the SEC's lawsuit hit the market.

READ: Tesla faces criminal probe by US over Elon Musk's statements on aborted go-private plan

Morgan Stanley analyst Adam Jonas said the settlement could "substantially" reverse Friday's share price decline for Tesla.

In a research note to investors, Jonas admits that the settlement was "fast," but that it significantly lowers the risk of spillover effects on capital markets, company morale and brand value, and that the resolution avoided the worst case scenario, where a prolonged negative newsflow cycle would potentially impair access to capital and demand.

Additionally, Jonas notes that the fines appear to be much smaller than investors expected, and sees a chance for the board to be strengthened and diversified. Jonas maintains an Equal Weight rating and $291 price target on Tesla shares.

RBC Capital analyst Joseph Spak kept his Sector Perform rating on Tesla. The analyst said the deal with the SEC was a positive outcome for the company as it will allow it to continue raising capital and keep Musk as the CEO.

READ: Tesla chief Elon Musk faces lawsuit from short-seller Andrew Left of Citron Research

Baird said the 3Q delivery numbers due out on Wednesday, October 3, will likely be seen positively by the market. The company previously indicated it expects Model 3 deliveries to exceed production guidance of 50,000-55,000 and continues to target 100,000 Model S and X deliveries in 2018.

"There are several catalysts upcoming, which we think could drive shares higher. We think 3Q deliveries (expected this week), 3Q results in early November, and upcoming announcements of the new chairperson/directors could be positive. In an internal email, Musk reportedly indicated Tesla is 'very close to profitability' which we think would be a positive catalyst, as well," Baird explained.

Canaccord analyst Jed Dorsheimer said though the "distractions" have likely impacted operations and now predicts a miss in Model 3 production, at 48,000 vs. expectations of 50,000-55,000.

Dorsheimer, who maintains a Hold rating and $316 price target on Tesla shares, said he would become more constructive as details of who the new chairman and independent directors might be or a significant improvement in the operations and profitability of the company.

Tesla develops, manufactures, and sells electric vehicles as well as batteries for energy storage.

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