Workhorse (NASDAQ:WKHS) stock suffered a 21.5% drop after the U.S. Postal Service delayed its decision yet again to award a $6.3 billion contract.
The decision is now expected in the second fiscal quarter of 2021. USPS is replacing the white, right-hand drive, and delivery trucks with the Next Generation Delivery Vehicle (NGDV). It will purchase about 180,000 vehicles will be purchased over five to seven years.
As you can imagine, if Workhorse gets the contract outright or gets a portion of the contract with another company, WKHS stock will quadruple. However, the delay highlights the risk associated with investing in Workhorse. Aside from the USPS contract and the general enthusiasm surrounding the EV sector, there aren’t many stock catalysts.
I want to take a position closer to the contract announcement. That’s not to say shares cannot rise in the interim. It has been an extraordinary year for electric car start-ups.
On June 10, Nikola (NASDAQ:NKLA), a US start-up specializing in fuel-cell commercial vehicles, briefly became more valuable than Ford after investors pushed its market cap to $33 billion. Nikola hasn’t sold a vehicle, against more than five million sales a year for Ford (NYSE:F). In July, Tesla (NASDAQ:TSLA) overtook Toyota (NYSE:TM) to become the world’s most valuable car brand.
The stock frenzy shows no signs of slowing down. Any positive news from the big guns like Tesla and NIO (NYSE:NIO) will lead to a favorable knock-on effect. I expect some of that to rub on WKHS stock as well.
Also, any positive or negative news on the USPS contract can tilt the scales one way or another. That makes the stock a bit of a gamble, in my opinion. However, with Workhorse likely to win, it’s not a bad bet to take.
Delay Is Preferable to Error
The delay in awarding the USPS contract has done a great deal of damage to WKHS stock. According to Kim Frum, a spokesperson for the Postal Service, the decision is due to the novel coronavirus pandemic.
While that is understandable, I believe politics also has a role to play. A few months back, several analysts felt the contract would go to Ohio-headquartered Workhorse.
At the time, many believed that since Ohio is a swing state, the Trump administration will award the contract to the company as an election sweetener. Also, Workhorse has a 10% stake in Lordstown Motors (NASDAQ:RIDE), led by President Trump’s close friend.
However, we didn’t get a decision by the election. Now, it’s only fitting that the incoming Biden administration settles in before the verdict. My colleague Josh Enomoto also brings up an excellent point. Although the Democratic ticket won on a clean energy ticket, domestic politics is seldom a zero-sum game.
The energy lobby is one of the largest and most powerful in Washington, D.C., a fact not lost on my colleague. ExxonMobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), BP (NYSE:BP), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP) are among the largest corporations associated with Big Oil. As Josh says, these companies employ a lot of people, leading to significant political capital.
None of them will like an all-electric solution, which is the one offered by Workhorse, as the preferred choice for the USPS contract. Although I remain bullish on WKHS, this is an important point to keep in your mind before you decide to invest.
Analysts Are Still Bullish on Workhorse Prospects
Out of all the finalists left, Workhorse remains the odds-on favorite to win the contract.
“Because of Covid, the EV industry has been hampered with both personnel and supply constraints,” said R.F. Lafferty analyst Jaime Perez, who is bullish on the electric truck startup. “We expected production delays and temporary setbacks throughout the EV industry, especially among the startup companies.”
While also issuing a favorable verdict, Cowen analyst Jeffery Osborne said he wasn’t surprised by the delay. “It is important to note that there have been several delays in this process over the past four years,” He rates Workhorse shares Buy and has a $23 price target for the stock.
Roth Capital analyst Craig Irwin believes the company is well-positioned with its all-electric offering. Savings on commercial vehicles accumulate faster than passenger vehicles, making the all-electric option attractive. Commercial vehicles are also easier to maintain, and they can be charged centrally at company-owned facilities.
Plus, Democrats have won the White House on a green agenda. Joe Biden calls for a 100% clean-electricity standard by 2035 and investing $2 trillion over four years in clean energy. Giving the nod to Workhorse, therefore, makes sense.
WKHS Stock Is a One Trick Pony
At this point, Workhorse is mainly trading on speculation. There is a lot of time between now and the announcement of the USPS winner. In between, a lot of lobbying will take place. Regardless, I believe Workhorse is in a better position than the rest of the finalists to win.
Capacity issues are often discussed as the main thing going against Workhorse. Granted, it’s a small company. But it has the ability to build up its operations. Workhorse already has the ability to scale its manufacturing through a 265,000 square foot plant. It also has the option of using the Lordstown plant, which has a 6 million-square-foot maximum capacity.
Regardless, until a decision is made on the contract, Workhorse stock will continue to ebb and flow. Shares have returned 603.6% for the year thus far, so clearly, it’s a great stock to trade.
It’s tough to talk about fundamentals; the USPS contract is the major catalyst here. If you load up on the stock now, it’s sure to benefit you when the stock goes hyperbolic after the announcement. Then again, if you don’t like taking a lot of risks, there is always Nio and Tesla. Both companies are doing exceedingly well and are finally delivering on all the hype.
I have a “neutral” rating on WKHS stock.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
