Is Workhorse Group a Buy Under $10?

Technology company Workhorse Group Inc. (WKHS) in Loveland, Ohio, is focused on manufacturing battery-electric vehicles and providing mobility solutions to the commercial transportation sector. WKHS' shares have gained 1.5% in price over the past five days, driven by the company’s recent deal with the U.S. Department of Agriculture to run a pilot program to provide small Unmanned Aerial Systems to support the Department’s efforts in Mississippi. But the stock has plummeted 15.8% over the past month and 50.9% year-to-date, reflecting investor concerns over WKHS’ underwhelming second-quarter earnings report.

Closing yesterday’s session at $9.81, the stock is trading 77.2% below its 52-week price high of $42.96. With the sudden replacement of its CEO Duane Hughes in July, WKHS withdrew its previously announced guidance of an expected production of 1,000 vehicles in 2021. Furthermore, the company’s new CEO, Richard F. Dauch, plans to revise its C-1000 vehicle’s design after delivering only 14 vehicles in the last reported quarter.

Although WKHS has been expanding its product line and improving its operational capabilities, the recent news regarding selling most of its stake in the embattled EV maker Lordstown Motors Corp (RIDE) could make investors anxious about the stock.

Click here to checkout our Electric Vehicle Industry Report for 2021

Here is what we think could influence WKHS’ performance in the near term:

Cashing Out of Start-up Electric Pickup Truck Maker

WKHS, which was an early investor in RIDE, divested 72% of its stock in the company this summer. The Wall Street Journal report said  the EV truck maker had sold 11.9 million shares of Lordstown Motors since July 1, thereby reducing its 9% stake by nearly three-quarters. The company expects approximately $79 million in net proceeds from the sale. As RIDE has tried to raise capital to ensure its survival, given that the company is battling investigations for allegedly overstating the volume of its pre-orders, its shares tanked, dragging down WKHS’ stock price tool.

Disappointing Financials

WKHS’ total revenue came in at $1.2 million for the second quarter, ended June 30, 2021, versus  $91,942 in the second quarter of 2020. However, its gross loss stood at $13.59 million for the quarter, up 857.7% year-over-year. The company’s other loss amounted to $11.7 million, attributable primarily to the reduction in the fair value of its investment in RIDE. WKHS reported a $34.42 million loss from operations, representing an increase of 392.8% from the prior-year quarter. Its net loss stood at $43.6 million, while its interest expense came in at $10.48 million during this period.

The company’s trailing-12-month ROTC and cash from operations are negative 15.8% and $133.79 million, respectively.

Lawsuits

In May, Bronstein, Gewirtz & Grossman, LLC, Zhang Investor Law, and Kuznicki Law PLLC filed a class-action lawsuit against WKHS on behalf of its shareholders for alleged misleading statements and failure to disclose details regarding its business, operations, and prospects. Furthermore, the Schall Law Firm, Pomerantz LLP, and several other securities law firms have filed class-action lawsuits against the company for alleged federal securities laws violations under the Securities Exchange Act of 1934. According to the complaint, WKHS did not disclose the fact that replacing the entire USPS fleet with electric vehicles would be significantly expensive. WKHS’ stock could take a major hit because investors remain concerned about the  lawsuits.

Stretched Valuation

In terms of forward Price/Sales, the stock is currently trading at 185.40x, which is significantly higher than the 1.30x industry average. Also, its 161.69 forward EV/Sales multiple compares with the 1.55 industry average. And WKHS’ 7.90x forward Price/Book is 120.4% higher than the 3.59x industry average.

POWR Ratings Reflect Bleak Prospects

WKHS has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. WKHS has an F grade for Quality. This reflects the stock’s negative ROTC and cash flow from operations.

In terms of Value grade, the company has a D, reflective of its premium valuation. Also, it has an F grade for Stability.

Beyond the grades we’ve highlighted, one can check out additional WKHS ratings for Sentiment, Growth, and Momentum here. Of the 63 stocks in the D-rated Auto & Vehicle Manufacturers industry, WKHS is ranked last.

Click here to check out our Automotive Industry Report for 2021

Bottom Line

While WKHS’ recent pilot program with USDA’s Natural Resources Conservation Service has captured investor interest, its shares suffered  a significant blow on the news of its divestiture from the cash-strapped Ohio-based EV startup RIDE. Furthermore, the company’s poor financial health and ongoing class-action lawsuits could cause a decline in its share price in the coming months. So, we think the stock is best avoided now.

How Does Workhorse Group (WKHS) Stack Up Against its Peers?

While WKHS has an overall F (Strong Sell) rating in our proprietary rating system, one might want to consider taking a look at its industry peers having an A (Strong Buy) rating: Suzuki Motor Corporation (SZKMY) and Daimler AG (DDAIF).

Click here to checkout our Electric Vehicle Industry Report for 2021

WKHS shares rose $0.04 (+0.41%) in premarket trading Wednesday. Year-to-date, WKHS has declined -50.40%, versus a 22.04% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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