Back to top

Image: Bigstock

Here's Why a 23% Plunge is Not Enough for Workhorse (WKHS) Stock

Read MoreHide Full Article

Electric vehicle (EV) stocks are gaining massive investors’ attention amid heightening climate change concerns. But are all stocks in the space worth the hype and your money? Not really. The alarming concern is that many of the EV stocks have rallied far beyond a reasonable price, which has pushed their market values exuberantly.

Workhorse Group (WKHS - Free Report) certainly seems to be one such stock. The EV maker — with its flagship product C-Series — has dazzled Wall Street as the excitement surrounding green vehicles is soaring with each passing day. So far this year, the stock has skyrocketed 730%, making it highly overvalued. Considering the stock’s weak fundamentals, any sharp pullback in the share price of Workhorse would not come as a surprise.

USPS Contract Delay Hammers Workhorse

Shares of Workhorse cratered around 23% at the close of the trading session on Dec 1, as the U.S. Postal Service (“USPS”) announced yet another delay to award its giant mail truck contract. The contract, which is likely to be split between multiple parties, would entail the manufacture of 180,000 delivery vans. After years of delay, the agency intended to award a $6-billion contract to upgrade its aging delivery fleet early this year. However, amid the coronavirus outbreak, the contract decision was pushed back to 2020-end. Amid the second wave of the pandemic, the program schedule has been revised and now the contract is expected to be awarded in the federal government’s second-quarter fiscal 2021.

The news of a further delay of the long-awaited U.S. Postal Service contract has hit Workhorse stock hard as the company is one of the three contenders of the contract, along with Turkey-based Karsan and Oshkosh Corporation (OSK - Free Report) .

Is it Time to Cash Out of the Stock?

While the contract delay has triggered a pullback, there are plenty of reasons to be worried about this stock. Workhorse — which shares space with other EV stocks including Arcimoto Inc. (FUV - Free Report) and Electrameccanica Vehicles Corporation — appears over-inflated and the bubble might just be waiting to burst. Let’s dig into some of the factors that make the stock due for further pullback, making Workhorse a poor investment choice at the moment.

Stretched Balance Sheet Raises Red Flag: Workhorse is highly leveraged, which restricts the firm’s financial flexibility to tap growth opportunities. Importantly, the company’s liability exceeds the assets, as is evident from its debt ratio of more than 1. A high debt ratio also puts the firm at a risk of default. Total debt to capital ratio of 1.1 compares much unfavorably with the industry’s 0.46.

 

No Clear Path to Profitability: It’s important for investors to note that the company is yet to turn an annual profit. Being in the business since 2007, it’s still struggling for profitability, with seemingly no strategic plan for a turnaround. The company’s income is getting marred by mounting capex, and SG&A as well as R&D costs. For the nine months ended September 2020, Workhorse’s operating expenses more than doubled to $20 million from the corresponding year-ago level.

Tough Q3 and Dim Prospects: In the last reported quarter, the company incurred a loss of 78 cents per share, wider than the Zacks Consensus Estimate of a loss of 11 cents amid high costs. Net loss of $84 million widened 631% from the year-ago level. Moreover, the company also warned that it may considerably fall short of the delivery target of 300-400 vehicles by 2020-end.

The firm expects lingering COVID-19 woes and associated supply chain issues to affect fourth-quarter results. The pandemic has prompted the firm to modify the assembly process, curtail production support from third parties and delay hiring, which are likely to get reflected in the upcoming results. While the company aims to develop 1,800 vehicles in 2021, production woes and supply chain distortions may come in the way of fulfillment of targets.

Workhorse, with a VGM Score of F, has been witnessing downward estimate revisions of late. The Zacks Consensus Estimate for 2020 and 2021 loss has widened by 45.8% and 58.6%, respectively, over the past 30 days.

Lofty Valuation Raises Concern: Despite Workhorse’s weak financials, production problems, rising expenses and accumulated losses, investors seem to be in love with the stock. Seemingly, investors are piling on the stock based on the EV frenzy but are overlooking the companies’ financials and other fundamentals. With eye-popping gains, the stock's valuation has got out of hand. Notably, Workhorse’s current EV/EBITDA stands at 27.2X, higher than the industry’s 9.56X. It has a P/S ratio of 25.08 versus the industry’s 0.78.

Final Thoughts

The general euphoria surrounding EV stocks has indeed resulted in meteoric gains in the share price of Workhorse. However, a stock cannot just endlessly run on hype. It eventually goes into correction to reflect its true fundamentals. Workhorse seems quite a speculative stock, with not much fundamental strength and lack of a sustainable business model. Hence, it would be prudent for investors to steer clear of the stock at the moment. Workhorse currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Names “Single Best Pick to Double”

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.

Free: See Our Top Stock and 4 Runners Up >>


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Oshkosh Corporation (OSK) - free report >>

Arcimoto, Inc. (FUV) - free report >>

Workhorse Group, Inc. (WKHS) - free report >>

Published in