Lordstown Motors (NASDAQ:RIDE) is looking like a winner, as RIDE stock has risen 21.5% since Oct. 26 when its SPAC (special purpose acquisition company) merger closed.
Moreover, in my last article, I wrote that the stock was worth $26.61 per share. As of Friday, Dec. 4, almost a month later RIDE stock has risen to $23.46, or close to that target.
I still believe that there is at least 30% upside and possibly more in the stock.
For example, Lordstown will use the $675 million in proceeds it received to start making its electric pickup truck, the Endurance.
This will be the first EV pickup to hit the market. Lordstown will be using a fully equipped truck plant in Lordstown, Ohio, that it acquired from GM.
The injection of the SPAC capital allows the company to jump-start its production line.
Plans for the Revived Plant
The company says it now has over 50,000 non-binding pre-orders for the first electric pickup truck in the U.S. It hopes to start delivering by mid-2021. This is up from 40,000 last month.
The truck is tailored more for commercial buyers. The average fleet order is for 500 trucks. These include Duke Energy (NYSE:DUK) and FirstEnergy (NYSE:FE).
The CEO, Steve Burns, recently told James Cramer on CNBC that the company has big plans with this shuttered GM assembly plant that Lordstown is reviving.
By the end of 2021, they hope to employ more people than GM had during their tenure there.
According to The Wall Street Journal, Lordstown plans on hiring 4,000 to 5,000 people, including 1,500 by the end of 2021. Even more interesting, Lordstown Motors has said it’s open to union representation, but there is no contract. The WSJ says that the jobs will likely pay less than those lost when GM was running the plant.
The key advantage of its huge assembly plant is that it means Lordstown has low capital requirements to get started.
In addition, the ongoing “capital intensity” requirements will also be fairly low. In essence, GM has already made the investments to put up the plant, and Lordstown got a bargain.
Projections Going Forward
Lordstown expects to make significant EBITDA (earnings before interest, taxes, depreciation, and amortization) profits by the end of 2024.
For example, on page 24 of the company’s slide presentation, Lordstown Motors estimates its future EBITDA profits. By 2023 it will make $298 million in EBITDA and $600 million by 2024.
The company says that this reflects a modest market share of just 3.5% by 2024 in the EV truck market. Most importantly, the company says that it will not any more capital to get to the point of produce EBITDA profits and “positive profits.”
This capital also pays for the construction of a new 700,000 sq. foot battery pack and hub motor production facility.
However, these plans do not include the introduction of any new product lines. That could end up costing more than the company’s forecast cash flow in the future and hence require more capital.
Valuing RIDE Stock
Nevertheless, Lordstown is still selling fairly cheaply now. For example, the market capitalization of RIDE stock is $3.8 billion. This is based on 164 million in pro forma shares outstanding from the company’s original Aug. 3 SEC filings.
However, the company has not yet announced how many actual shares it now has outstanding, as of the end of Oct. when the merger closed.
In addition, as Lordstown has $675 million in cash from the merger, its enterprise value (EV) is now $3.17 billion. That means its 2024 EV-to-EBITDA ratio is just 5.17 times.
For example, at a 15% discount rate, the present value factor is 57.2%. This makes the $600 million worth $343 million in today’s dollars. Therefore the adjusted present value EV-to-EBITDA ratio for RIDE stock is just 9.2 times (i.e., $3.17 billion divided by $343 million).
This is still very cheap compared to its peers. Page 27 of its presentation shows that the average is 10 times. That implies at least a 10% increase in RIDE stock.
Those multiples of Lordstown’s peers are not discounted to the present value. Therefore, the more likely value is at least 30% higher, or $30.00 per share.
What To Do With RIDE Stock
TipRanks.com reports that there are two analysts who have written on RIDE stock in the last 3 months. The average price target is $32.50 per share. One of the reports has a $50.00 stock price target.
I suspect that now that the company has completed its reverse merger, more analysts will come out with articles on RIDE stock.
Lordstown will report its first operating quarter as a merged company for the Q4 quarter. That will give us the exact number of shares, cash on its balance sheet, and the precise plans that the company has to ramp up.
At that point, I think there will be keen interest in RIDE stock by sell-side analysts. Many will be attempting to fill out their business models and introduce a price target for the first time. Look for the stock to move higher, closer to $30.00, as that happens.
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.
