Workhorse Group: Bleeding Cash Puts Business Plan In Limbo (NASDAQ:WKHS)

Construction machinery, auto manufacturers, and heavy trucks companies have suffered a beating over the past year with most riding in the high-risk performance category. Nikola Corp (NKLA) is down 26.69%, Workhorse Group, Inc. (NASDAQ:WKHS) is at -73.02% and Lordstown Motors (RIDE) lost 74.95% while Fisker Inc. (FSR) declined 5.41%. These stocks have moved contrary to investor sentiment as industrial demand recovered from the Covid19 supply-related shocks.

Thesis

In this article, I will explain why this stock is a hold. Workhorse is leading the pack in the manufacture of fully electrified vans and step vans which represent about half of the commercial vehicles in North America. A delivery truck with a drone on top is not a bad idea for a company that intends to increase efficiency in package delivery. However, the market did not react positively after Workhorse announced a stock deal to wipe its debt from its balance sheet. With new management in place, the company intends to re-establish its growth plans even after revising the manufacture of the C-1000 electric vans. Still, Workhorse is reshaping its product roadmap with new supply agreements that will lead to a revenue increase in 2022. In my view, the success of the company will depend on the strength of the supply chain’s visibility.

In its Q4 2021 earnings call, Workhorse was optimistic that it will manufacture and sell 250 vehicles and generate at least $25 million in revenue in 2022. The company stated that production would begin in the second half of 2022 since its guidance was backloaded in the first half of the year. However, as of September 30, 2021, WKHS had recalled C-1000 and the operational loss rose 26.46% to $75 million from $59.3 million in the 12 months to June 2021.

Sales, net returns, and allowances attributed to Workhorse have declined since 2020 when it hit a high of $1.4 million. The year ended on December 31, 2021, saw sales tumble to a loss of $0.9 million. The sale of the C-1000 vehicles has contributed to a higher chunk of the revenue for the last 3 years. It came as a shock after the company announced its desire to suspend delivery of its C-1000 vehicles in Q3 2021 in compliance with the Federal Motor Vehicle Safety Standards.

Taking the C-1000 off the road has had a drastic effect on the company, especially from a revenue standpoint. Net loss stood at $156.1 million compared to a net income of $280.5 million in 2021. The fourth quarter saw operational loss rise to $120.4 million compared to a meager $15 million in Q4 2020.

Details emerged that Workhorse lost out on a multi-billion-dollar contract with the U.S. Postal Service to modernize its delivery vehicle fleet. The contract was awarded to Oshkosh (OSK) which will deliver up to 165,000 of the U.S. built vehicles over the next 10 years. It is expected that Workhorse will conduct a radical review of its product roadmap. Scheduled for release are the W750 in Q3 2022, the W56 in Q3 2023, and the W34 in 2024.

Workhorse CEO, Rick Dauch stated that the W56 represented the company’s shortest path to battery-powered EV production and is now priority No.1. Its targeted payload range is greater than 7,000 pounds. On its part, the W34 is a next-generation EV and class 3/4 vehicle.

WKHS announced its multi-year supply agreement with the Canadian GreenPower Motor Company (GP). The company expects that by July 2022, it will receive 1,500 EV star cabs and chassis for the new Class 4 W750 van line.

With the agreement expected to last until March 31, 2024, Workhorse disclosed that the project needed a working capital of approximately $20 million. Greenpower expressed optimism about the success of the agreement since it indicated that the supply was ongoing having a hit a 6-month timeline at the time of the announcement. This project is achievable since the company’s working capital at the end of 2021 was $188.6 million from $216.2 million in current assets and $27.6 million in current liabilities.

How Long Will Its Cash Levels Last?

As of December 31, 2021, WKHS’s cash and short-term investments stood at $201.6 million. A look at its CapEx shows that it used up $132.6 million TTM. Calculations indicate that the cash levels will only support the company’s operations for the next 12 months since it uses $11.05 million per month.

Back in October 2020, Workhorse realized $200 million in capital proceeds as a senior secured convertible note. The company expects to use these funds until the end of 2022. In its 10-K, the company stated that if the opportunity arose, it may raise additional capital in 2022 through an At-the-Market program or a similar financial instrument.

Capital expenditures in its Indiana, Ohio, and Michigan facilities are expected to range between $25 million and $35 million far above the stated monthly expenses. Any increase will mean, the ATM offering will be required by November 2022.

In its 10-K annual report, Workhorse expressed doubt over the full execution of its business plan that envisioned two new developments. In 2023 and 2024, Workhorse expected to complete two new truck chassis, that is the W56 and the W34 respectively. A new delivery van was also due for completion by late 2022. As it stands, only the new Class 4 delivery van may be ready. But it will take time before the company launches and ramps up production as required.

The Commercial Vehicle Market

The global commercial vehicle market is projected to grow by 3785.23 th units during the forecast period of 2022-2026. It is expected to progress at a CAGR of 4%. According to the North American Council for Freight Efficiency (NACFE) vans and step vans in the US and Canada are reportedly 100% electrifiable today. The use of these vehicles would avoid 43.5 million tons of CO₂ emissions annually equivalent to removing nearly 5 billion gallons of gasoline from the economy (every year).

As stated, there has been a shift in consumer behavior that has tilted towards commercial vehicles. Ford Motors (F) is ramping production of its Transit Connect and larger Transit models. The company has announced the 2022 E-Transit, an all-electric cargo van offering. It uses 40% fewer maintenance costs than the average gas-powered 2020 Transit over 8 years/ 100,000 miles.

On its part, General Motors (GM) unveiled its BrightDrop and EV600 in early 2021. BrightDrop’s EP1 was available on roads by the first half of 2021 while EV600 came on the stage before 2022. FedEx (FDX) was GM’s first customer of the integrated commercial solution with fast-charging features. A common factor with these two offerings, GM’s and Ford’s, is that they have 600 cubic foot cargo capacity. However, Workhorse is delivering a 650-1200 cubic foot capacity. It has a higher capacity indicating the company wants to outsmart the current competitive market with its E-series models.

Risks

Workhorse is still hemorrhaging money. It is yet to recover from the costly recall of 41 vehicles issued in 2021. The sale of 41 vans last year that was not in compliance with the safety standards set by the National Highway Transportation and Safety Administration (NHTSA) will continue to haunt the company.

The company is yet to come to terms with the withdrawal of the C-1000 that was not up to the task of heavy-duty deliveries. Since the year ending on December 31, 2020, losses have surged 334.88% from $41 million to $178.3 million in 2021.

There is a gap in mass EV production (of the Class 4 delivery van) that will ensure shareholders get value for money after GreenPower supplies the new truck chassis. The gap is a result of the recall that is yet to be resolved by the company.

Bottom Line

Workhorse has developed a strategic product roadmap for its electric vehicle delivery offerings. However, the two new chassis platforms (W56 and W34) that are targeted for completion in 2023 and 2024 may be late for delivery if the company does not balance its growth with operational expenditures. After the recall of the 41 C-1000 vans back in 2021, there is no assurance that the company will meet the regulatory requirements set by the Fed. Still, these new product offerings will revolutionize the EV van and step van market since they offer larger cargo capacities. For these reasons, we propose a hold rating for the stock.