How Self-Serving Management Can Still Save Workhorse Stock From $0

WKHS (NASDAQ:WKHS), the struggling electric van maker, has ridden a massive wave of investor optimism this summer. WKHS stock is up about 650% as investors have piled into the money-losing company. A Workhorse (WKHS) W-15 hybrid electric pickup truck on display at a branding event in Flatiron Plaza in New […]

WKHS (NASDAQ:WKHS), the struggling electric van maker, has ridden a massive wave of investor optimism this summer. WKHS stock is up about 650% as investors have piled into the money-losing company.

A Workhorse (WKHS) W-15 hybrid electric pickup truck on display at a branding event in Flatiron Plaza in New York.
A Workhorse (WKHS) W-15 hybrid electric pickup truck on display at a branding event in Flatiron Plaza in New York.

Source: rblfmr /

But don’t let these gains fool you. Workhorse remains the weakest company among all U.S. electric vehicle (EV) makers. The company also has some of the worst self-dealing management I have ever encountered in my years of investing.

But if you’re comfortable investing with an unscrupulous management team, here’s why WKHS stock may still rise.

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WKHS Stock: A Rising Tide Lifts All Boats

Electric vehicles have transformed both the transportation and energy industry. Analysts now forecast oil demand to fall after 2027-2028 as EVs gain popularity.

In fact, EVs are one of the brightest growth industries that I track.

But great industries can hide some utterly terrible companies. As investors look for “the next Tesla (NASDAQ:TSLA),” tremendous and awful companies alike can find themselves awash in cheap financing, keeping even the most unprofitable companies alive, at least temporarily. It’s happened before in the dot-com boom.

WKHS finds itself in the exact same situation. Years of losses and poor management have saddled the company with debt and cash flow issues. But the company lives on thanks to wishful thinking.

Failure at Vans, Success at Enriching Management

Despite its tough-sounding name, Workhorse has been an utter failure at selling vans.

In 2013, AMP Electric Vehicles, a company that retrofitted cars with EV powertrains, bought the Workhorse name from trucking behemoth Navistar (NYSE:NAV). Since then, AMP has proceeded to wreck its acquisition.

Between 2016-2017, the company sold 1,405 electric vans UPS (NYSE:UPS). Since then, it’s failed to sell much more. By 2019, Workhorse earned just $376,562 in revenue.

In those four years, the company lost a total of $96 million created $95 million of convertible debt. And in Q2, the company lost another 131 million on a mishandled note conversion.

Meanwhile, the top two managers took home $8.3 million in salary and stock-based compensation.

While I love the electric-vehicle industry’s growth potential, Workhorse hasn’t exactly played its cards well.

What About the USPS Contract?

WKHS stock supporters would counter that the company could still win a $6.3 billion USPS contract to replace its 180,000-van fleet. “Could,” however, is the operative word. Investors with a better memory would remember USPS has dangled this prospect since 2014. USPS has also since suggested splitting the contract into smaller pieces.

Workhorse may still win the contract, of course. But at an average purchase price of $35,000, the USPS contract is unlikely to be highly profitable for any player. It’s no surprise that two contenders have already dropped out. General Motors (NYSE:GM) isn’t putting in a bid, and Ford (NYSE:F) has teamed up with defense company OshKosh (NYSE:OSK) instead of going in alone.

It’s also questionable whether WKHS’ vans are any good for their price. In January, UPS placed 10,000 orders with EV startup Arrival, while sending just 1,000 orders for Workhorse.

How Can WKHS Win? Lordstown Motors

In 2019, Workhorse’s CEO, Stephen Burns, resigned to start up his own electric vehicle company, Lordstown Motors (LMC). In exchange for some intellectual property (IP), Workhorse received some nice-looking perks:

  • 10% equity stake in LMC.

  • 5% on the first 6,000 LMC units sold.

  • 1% on the next 194,000 LMC units sold.

Why so generous? That’s because Workhorse had been developing a much-hyped, all-electric pickup truck, the W-15, since 2017.

And that IP that Stephen Burns took? It WAS the W-15 pickup.

In other words, Stephen Burns stripped out 90% of WHKS’s most valuable asset and moved it into his own private company.

WKHS investors should be furious. Usually, a company would spin off valuable assets. That gives investors full ownership of both the original and new companies. The WKHS-LMC deal, on the other hand, left WKHS shareholders with only a sliver of ownership of the new company.

If that’s not self-dealing, I’m not sure what is.

Can Lordstown Motors Succeed?

Self-dealing aside, here’s where investors could make an investment case: Lordstown Motors can still go up.

And that could make WKHS’ 10% stake worth billions.

In 2019, Lordstown bought GM’s 6.2 million square foot plant in Lordstown, Ohio, earning the company accolades from the White House.

The company now claims to have 27,000 advance orders for the W-15, since renamed the Endurance. That’s equal to the number of cars Tesla sold back in 2015.

Investors should grimly cheer; LMC is scheduled to go public in 2020 via a Special Purpose Acquisition Company (SPAC). There’s never been a better moment to invest in electric vehicles. Tesla’s market capitalization, for instance, surged past the top six automakers combined this year. Even Chinese EV startup Nio (NYSE:NIO) surpassed Ford’s value.

Suppose LMC can quickly list itself via a SPAC while investors are hooked. In that case, the company will likely jump on investor demand.

Just One Problem: What’s Lordstown’s Game Plan?

Lordstown’s Endurance release in 2021 will coincide with Tesla’s Cybertruck, a pickup that will cost just $39,900 and already has 650,000 pre-orders. That’s far cheaper than the Endurance’s lofty $52,500 price tag.

And in the high-end pickup market, Lordstown will face even stiffer competition against the Nikola (NASDAQ:NKLA) Badger and Rivian R1T. That’s because, unlike Workhorse and Lordstown, Nikola and Rivian are provenly competent EV makers. On Monday, GM announced a $2 billion investment in Nikola.

Lordstown’s CEO has told investors not to worry. The Endurance “has been systematically engineered and competitively priced specifically for the large commercial fleet market,” Burns said. “We have secured $1.4 billion of pre-orders.”

Skeptical investors are right to worry. The Endurance costs twice as much as Ford’s conventional F-150. As for their pre-orders? It turns out their largest single “order,” made by Servpro, was only a non-binding letter of intent.

What’s WKHS Stock Worth?

Investors looking for long-term plays in the electric vehicle market have many great choices. But WKHS isn’t one of them.

Because of WKHS’ massive past losses, the company finds itself in a financial sinkhole. Sales in Q2 came in at just $91,942, while cash burn topped $17.7 million. With just $26.2 million left in the bank, it doesn’t take a calculator to realize that the company needs a lot of money to stay afloat.

Yet, investors’ desire to find the next Tesla will likely wash away these well-founded fears, at least in the short term. If Lordstown’s SPAC IPO hits the right notes, WKHS stock will rise regardless of actual business outlook. Speculators will say, “I told you so.”

Smart investors, however, will look for better choices in the promising electric vehicle industry. That’s because, at current trends, they’ll quickly realize what WKHS stock is worth: precisely $0.

Save your money and invest better.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.

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