On Aug. 3, Lordstown Motors agreed to merge with the special purpose acquisition company DiamondPeak Holdings (NASDAQ:DPHC). As it stands now, DiamondPeak stock looks like it is fully valued. But that does not mean the stock won’t rise after the deal closes.
Lordstown will use the $675 million in proceeds it receives at the close to begin manufacturing its electric pickup truck, the Endurance. This will be the first EV pickup to hit the market since Lordstown will be using a fully equipped truck plant in Lordstown, Ohio, that it acquired from GM.
Moreover, the company looks like it will be very profitable. It projects that, based on the 27,000 pre-orders already received, it will make significant EBITDA (earnings before interest, taxes, depreciation, and amortization) profits by the end of 2024.
Moreover, the merger looks like it will close on Oct. 22 or shortly thereafter. That is when there is a shareholder vote on the deal. The stock will then change its symbol to “RIDE.” The publicly traded company will be known as Lordstown Motors Corp.
One reason the stock looks to be at full value is that DiamondPeak stock has risen substantially since the deal was first announced. For example, on Aug. 3, the stock closed at $12.39. But now it is at $25.19, up 100% in the past two months.
Valuing Lordstown Motors
Moreover, we can now easily value Lordstown given using the financial forecasts in its slide presentation. To start with on page 26 of the slide deck, the combined companies will have 164 million shares outstanding on a pro forma basis at the closing of the deal.
Therefore, that means that DiamondPeak Holdings now has a pro forma market capitalization of $4.1 billion. We derive this by multiplying $23.20 per share times 164 million shares.
Next, we can calculate the enterprise value. This is useful since we can use this to compare DiamondPeak stock (later RIDE stock) to its EBITDA, and see if this ratio higher or lower than its peers.
For example, Lordstown Motors will receive $673 million at the closing of the deal. Therefore, its pro forma enterprise value is $3.13 billion.
In addition, based on page 24 of the slide presentation, Lordstown projects that its 2023 EBITDA number will hit $298 million and by 2024 it will be $600 million.
Therefore, its pro forma enterprise value-EBITDA ratio for 2023 is 10.5x EBITDA. But the 2024 ratio is just 5.2x (i.e., $3.13 billion divided by $600 million).
Keep in mind that projecting out revenue and EBITDA this far out in the future involves a good deal of risk. Nevertheless, based on Lordstown’s own slides its valuation looks fairly valued.
For example, the slide presentation shows EV-EBITDA ratios for Lordstown’s peers on page 27. The chart shows that for 2021 the ratios of its public peers range from 8.2x to 11.1x , with one outlier.
Therefore, the implied ratios for 2024 will likely be significantly lower, probably by at least 50% to 60%. This is why DiamondPeak stock is at full value.
What To Do With DiamondPeak Stock
But so what? This does not mean that DiamondPeak stock (actually RIDE stock) won’t rise substantially once the deal closes and the symbol changes.
In other words, there is no reason whit is highly possible the stock will move up and become overvalued. I highly suspect that could be the case here. This is despite the old Wall Street adage that in the face of a major known stock event, you should “buy on the rumor and sell on the news.”
One reason is that Wall Street analysts will be free to begin coverage of the stock immediately. This is not an IPO deal so they can begin writing up their forecasts for Lordstown.
And to be honest, this is a very powerful merger. For example, General Motors (NYSE:GM) will invest in the PIPE investment (private investment in public equity) at the close and the Lordstown plant, fully equipped, is a former GM plant.
Moreover, the Lordstown claims that it will not have to raise any further equity capital until it reaches EBITDA profitability in 2023. Lastly, the Endurance pickup truck looks like it will be very competitive. It will be the cheapest full-sized pickup, with very low maintenance and fuel costs. It will be produced before GM and Ford (NYSE:F) have their EV pickups on the market.
Therefore, I believe RIDE stock could easily rise another 10% to 20% from here, even though DiamondPeak stock looks fully valued now.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
