Workhorse Group Inc

Workhorse Group Inc (NASDAQ: WKHS) manufactures medium-duty trucks with powertrain components. It also develops battery-electric vehicles including aircraft and trucks.

Investment Rationale – SELL at USD 8.35

• Turned into net losses in Q1 FY21 from net income in Q1 FY20, and even production guidance for FY21 is lower than the market expectations.
• The outlook is not promising in the near term with rising commodity and operational expenses, production bottlenecks, underwhelming quarterly results, and supply chain issues.
• With likelihood of increased cash burn with higher operating cost amid negative gross margin, the Company can also face a liquidity crunch.
• From a technical standpoint, 51-day EMA (USD 16.69) and 21-day SMA (USD 9.71) are sustaining above the current market price and indicating a bearish trend.
• In terms of valuation multiples, EV/Sales and Price/Book metrics are quite overvalued against the Automobile & Auto Parts industry.
• The stock price has fallen over 70% in the past six months, reflecting a substantial underperformance against the benchmark index.

Risk Assessments

• With shipping delays with raw-material and global supply chain issues, the Company might fail to achieve its production target for FY21.
• The electric vehicle market is facing regulatory tailwinds, while the demand and supply outlook for Workhorse seems uncertain.
• The competitive landscape is also challenging, and the Company does not have any clear competitive advantage.

Recent News

10 May 2021: WKHS signed an agreement with EAVX (a subsidiary of J.B. Poindexter & Co.) for expanding its product offerings.

Financial Highlights the first quarter ended 31 March 2021 (10 May 2021)

 (Source: Company Website)

• During Q1 FY21, net sales increased to US$521,060 from US$84,300 in Q1 FY20, supported by the increase in trucks delivered.
• However, cost of goods sold, selling, general & administrative expenses, and research and development expenses also increased during the first quarter due to increase in consulting & employee costs and development projects in pipeline, respectively.
• Consequently, net loss increased to US$120.5 million from net income in the same period prior year.
• The Company has manufactured a total of 38 C-series vehicles so far in FY21.
• At the end of March 2021, WKHS had US$205.1 million in cash.

Share Price Chart    

 (Data Source: REFINITIV, research done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative) 

Conclusion

WKHS’s management has reduced its production guidance for FY21, following the massive losses in Q1 FY21. Even the forecasted production seems uncertain given the supply shortages. Although the Company is reporting a net cash position presently; however, the cash burn is likely to surge with negative gross margin and higher operating costs. Therefore, the upside potential in the stock is limited and equity could be negatively impacted in the short-term. The stock made a 52 week High and Low of USD 42.96 and USD 2.44, respectively.

Based on the weak fundamentals, volatile stock movement, production challenges and unfavourable valuation conducted above, we have given a “SELL” stance on Workhorse Group Inc at the current price of USD 8.35 (as on 25 May 2021, at 9:45 AM EST), while we look forward to reinvesting when these production uncertainty fades away and we have better clarity regarding the guidance. 

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

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