Can Workhorse Finally Overdeliver (Or Is It Just Too Late For The EV Maker)?
2022.06.01 15:36
Workhorse Group (NASDAQ:WKHS) was early to the electric-vehicle revolution. However, execution has been so poor that 16 years after its founding as AMP Electric Vehicles, the manufacturer of zero-emission commercial vehicles is running out of time.
To be fair, new management has addressed the company’s problems head-on. The strategy now seems coherent and the outlook from the company is far more reasonable. There is still a chance that Workhorse finally delivers on some of its potential.
But a chance is not a guarantee—and the path forward for Workhorse continues to be fraught with risk. Management still has a lot of work left to do, and, importantly, not a lot of cash left with which to do it.
How We Got Here
The original business model for Workhorse was to convert internal combustion engine ICE passenger vehicles to electric powertrains. In 2013, thanks to roadblocks (no pun intended) to that model, the company pivoted to the design of electric delivery vans. Workhorse even received a stroke of luck when Navistar—which is now part of Munich based, Traton (ETR:8TRA), which manufactures commercial vehicles—chose to sell its Workforce subsidiary that manufactured chassis and its factory in Indiana.
Workhorse set to work building its flagship C-1000 van. It promised 2,000 deliveries in 2018 but got nowhere near that target; total sales to date are less than 500 units, and the C-1000 now is being discontinued.
Famously, it also aimed to win a multi-billion contract from the United States Postal Service (USPS). Short sellers warned that the company simply didn’t have the capability to supply the needed vehicles. Eventually, the USPS agreed, awarding the contract to Oshkosh (NYSE:OSK), pummeling Workhorse stock in the process.
Along the way, management talked up Workhorse’s HorseFly drone system as well. That, too, went nowhere.
Incredibly, Workhorse posted negative revenue in 2021, due to the returns of the C-1000 (all of which were recalled). But the company only generated $1.3 million in sales the year before.
To be blunt, this is a company that has done nothing successfully but raise capital. With WKHS stock around $3, its ability to do even that is in question.
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To be fair, Workhorse finally figured that out. In July of last year, the board replaced former chief executive officer Duane Hughes with Rick Dauch, the former head of auto parts supplier Delphi Technologies.
Dauch brought a clearly sober tone to Workhorse’s commentary—and an axe to its executive team and strategy. The entire top of the company has been swapped out. And after fourth quarter results earlier this year, the company detailed a multi-year product roadmap. As noted, the C-1000 was let go (though Workhorse will repair and sell current inventory, while building 50-75 more units mostly from parts on hand).
A new model, the W750, will be sourced via chassis from Canada’s GreenPower (NASDAQ:GP). From there, Workhorse plans to launch two proprietary models. The W34 should start production in the second half of next year, with the W56 launching in 2024.
Workhorse hopes to sell those models to customers originally interested in the C-1000. Talks continue, potentially including UPS (NYSE:UPS), a customer Workhorse’s prior management repeatedly touted. (Dauch has refrained from detailing those discussions further.)
Between the C-1000 and the W750, Workhorse plans to sell “at least 250 vehicles” this year, generating $25 million-plus in revenue. From there, the company still believes there’s demand in the market for the W34 and the W56.
And while there is no shortage of competitors, Dauch argued on the first quarter earnings call that Workhorse still had a chance to break out of the pack. He spoke of attending an industry trade show and thinking that in the EV space, “half the companies here are not real companies…So I feel very comfortable that if we execute on our plans…we can still be first to market in our segment.”
From past management, that kind of talk would have merited unreserved skepticism. When Dauch says it, however, investors should at least listen. Indeed, the very fact that Workhorse reiterated its full-year guidance after Q1 results last month is a step in the right direction.
Workhorse has been the epitome of a company that has overpromised and (literally) underdelivered. The key reason to buy WKHS stock at $3 is that, under Dauch, Workhorse no longer is that kind of company.
The Capital Problem
There is a problem, however. Workhorse has a cash problem. At the end of the first quarter, the company had $167 million in cash. An agreement in early April converted the last of Workhorse’s debt into stock—but the company still is burning through its reserves at a rapid pace.
In the first quarter, free cash flow was negative $34 million. About $6 million of that came from a deposit with GreenPower; that deposit will limit cash outflow as W750s are delivered. Revenue from the C-1000s ostensibly can bring in another $20 million or so (since the remaining cash costs for those vehicles will be minimal).
Still, Workhorse burned $138 million in cash last year, a quarterly rate of over $34 million. Excluding the deposit, Q1 burn was $28 million. Accounting for cash from the C-1000, Workhorse has maybe seven quarters’ worth of cash remaining.
Workhorse’s own roadmap suggests that’s not enough. It only gets the company to the end of 2023—before the W56 is even launched. The burn rate doesn’t account for new employees coming on board to drive production or actually sell the vehicles. The launches will cost money. Workhorse will need cash to pay for the parts needed to build inventory of the W34 and W56.
On the Q4 call, chief financial officer Robert Ginnan admitted as much, saying the company’s cash (then about $200 million) was “sufficient for the near term.” But he added that “we will be looking longer-term at raising capital.”
And there’s the rub. Workhorse can’t raise debt without revenue. But with a market capitalization of just $460 million, selling stock isn’t easy, either. Any buyers of a secondary offering would require a huge discount to the current price. Workhorse probably would dilute current shareholders by 30-50% simply to raise an incremental $150 million.
If WKHS stock can find a rally, perhaps the company can do a bit better than that. But even in a best-case scenario, dilution is coming. That alone seems likely to provide an overhang to the stock.
And it’s one more reason why even investors optimistic toward Dauch and Workhorse should consider being patient. Workhorse itself may not have a lot of time, but that does not mean investors need to hurry.
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