Workhorse Group (NASDAQ:WKHS) is in for a nice bump in its stock price when its strategic partner company, Lordstown Motors goes public. WKHS stock will benefit since it owns a 10% anti-dilutive stake in the Ohio EV maker. Lordstown just agreed on Aug. 1 to merge with a SPAC called DiamondPeak Holdings (NASDAQ:DPHC).
I recently wrote about the DiamondPeak Holdings/Lordstown Motors reverse merger and I came up with a value for the EV truck manufacturer. This is important because if we can determine the value of Lordstown Motors, we can see the value of the Workhorse stake.
How That 10% Stake Benefits WKHS Stock
For example, in my article, I estimated that Lordstown Motors will be worth at least 2 or 3 times its existing implied market value of $2 billion.
This is because Tesla (NASDAQ:TSLA) is trading for up to 10x its present sales and Lordstown has potential revenue of as much as $1.4 billion. Therefore, Lordstown could be worth at least 3x-5x its expected potential sales, or $4.2 billion-$7 billion.
The net result is that Workhorse’s 10% stake in Lordstown is worth at least $420 million to $700 million, once DPHS merges with Lordstown. That is expected to happen sometime in Q4 2020.
Let’s think about this more carefully. Everyone knows that WKHS stock has a 10% stake in Lordstown, and eventually the combined DPHS/Lordstown stock. That company, once public after the reverse merger, will change its symbol from DPHS to RIDE.
But here is the thing: Workhorse stock has a market capitalization of $1.76 billion. Therefore, the Lordstown stake in RIDE could be worth more than 43% of its total value.
That implies that Workhorse’s own operations are worth only $900 million or so. That is way too low. The market is undervaluing the operating company stub value of WKHS stock.
Valuing the Operating Company
Workhorse has minimal revenue right now but is bidding for a large potential contract for 160,000 of its EV vans with the U.S. Postal Service. It also has contracts with Ryder (NYSE:R), United Parcel Service (NYSE:UPS), DHL Worldwide Express, and FedEx (NYSE:FDX). In addition, according to a Cowen analyst Jeffrey Owens, it plans to make 300 to 400 electric vans by the end of the year.
Analysts expect the company to generate $148.6 million in sales by the end of 2021. So its present price-to-sales ratio is 10.7x at its present market cap. But if you ex-out the $900 million potential value for its RIDE stake, that values the WKHS stock at just 6x sales.
In other words, once RIDE is public, assuming the underlying company is valued at 10.7 times sales, its market value will likely rise to $2.5 billion. This is equal to its present $1.6 billion market cap plus its $900 million stake in RIDE. This means that WKHS stock is worth up to 56.25% more than its price today.
Therefore, this implies that WKHS stock is worth $23.86, or 42.4% higher than its present price of $16.75 per share.
What to do with Workhorse Stock
Cowen’s analyst raised his target price on Workhorse from $11.50 to $20 after the company’s recent Q2 earnings, according to Barron’s. Recently Bloomberg reported that a significant shareholder, Formidable Asset Management, believes Workhorse’s stake in Lordstown could be worth $1 billion. That is even higher than my estimate.
Two big events will affect WKHS stock in the fall: The USPS contract outcome and the reverse merger of Lordstown and DPHC stock. Depending on what happens you could see Workhorse stock falter or jump even higher than my estimates.
In other words, this is almost a binary stock situation. A good result in both outcomes will see WKHS shares likely shoot past my estimated value of $23.86 per share. A poor outcome in both situations will see the stock drop from here. Let’s see if we can put an estimate on the likely result.
For example, The Verge.com reported there are four bidders for the USPS next-generation truck contract. One or multiple bidders could win the deal worth up to $6 billion for up to 200,000 new trucks. Apparently, according to Benzinga, Workhorse’s CFO believes they are the only viable EV bidder.
Calculating Expected Value
Let’s say there is only a 33% chance that it will win the USPS next-generation truck contract. And let’s estimate that there is an 80% chance it could win at least a third of the $6 billion contract. That gives WKHS stock an expected value (EV), using probability an alysis, of $1.5 billion.
Next, let’s assume there is a 50% probability that the DPHC/Lordstown stock will rise to a Nikola (NASDAQ:NKLA) type value of $7 billion to $10 billion. That would put Workhorse’s stake at 50% of $700 million to $1 billion. Therefore this portion of Workhorse’s EV is worth $450 million.
So, already we have a summation EV for WKHS stock of at least $1.95 billion ($1.5 billion, plus $450 million) based on probability estimates. However, this does not even include its existing contracts.
Let’s estimate that those contracts are worth $55 million in sales or $550 million in market value, using a 10x multiple. Altogether then, the sum-of-the-parts expected value for Workhorse stock is $2.5 billion. This is 55.27% above its present market cap of $1.61 billion.
Therefore, the expected value for WKHS stock is $23.71 per share. Look to make good money over the next six months by buying this stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
