Romeo Power (NYSE:RMO), an LA-based electric battery maker for trucks closed its reverse merger with a SPAC called RMG Acquisition at the end of December. Since then it has risen 100% but there is still has room for RMO stock to move higher.
This is based mainly on the company’s slide presentation with the original announcement of the proposed merger on Oct. 5. The deal, priced at $10.00 per share, envisioned a market value of $1.33 billion, assuming 133.4 million shares outstanding.
According to the report, the transaction represents a value of 1.3 times enterprise value-to-revenue. But that was when RMO stock was at $10.00 per share. Today it sits at just over $19.
Moreover, RMO has $340 million in cash on its balance sheet making its enterprise value $2.605 billion. With a 2023 revenue is forecast at $765 million, its enterprise value-to-sales ratio is 3.4 times.
That is not a very high ratio. For example, right now Workhorse Group (NASDAQ:WKHS), which has a similar market cap of $2.8 billion, trades for 20 times 2021 forecast sales.
RMO Stock and the Competition
Even if WKHS stock sales quadrupled to $554 million in 2003, its price-to-sales ratio would be five times. The enterprise value-to-sales ratio would be slightly higher as Workhorse has net debt on its balance sheet. This gets added to a market capitalization to derive the enterprise value.
Therefore, if we valued RMO stock at an enterprise value of five times, it should be worth $3.825 billion. In addition, we add back the $340 million in cash, to derive a $4.165 billion market cap.
This represents a potential gain of 41.4% over its existing market cap of $2.945 billion. In other words, RMO stock is about $31.22 per share.
Romeo Power’s electric batteries seem to be in high demand in the commercial market. It claims to be a leader in the hardware, software and thermal management of electric batteries for commercial vehicles.
For example, its presentation shows that it has 17 “blue chip” customers. This includes BorgWarner (NYSE:BWA) which is also a strategic investor in the company. In addition, Romeo Power has customers that represent 68% of the North American Class 8 truck manufacturers.
The company says it has good revenue prospects, claiming $310 million in contracted revenue with another $2.4 billion under negotiation.
This implies that the RMO stock should be priced higher than it is today at just 3.4 times EV-to-sales. In fact, my estimate of a five-times ratio is probably too low, given the quality of its projected sales over the next several years.
What to Do With RMO Stock
The value we have given RMO stock of $31.22 per share could actually be too low, given the quality of its earnings. For example, at 10 times sales in 2023 the stock would be worth $7.65 billion, plus the $340 million in cash, or $8 billion.
Even if we were to discount that at 20% over 2 years, or 69.44% of its future value, the market value would be $5.55 billion. This represents a potential gain of 88.6% over today’s price. It means that on the upside RMO stock could be worth as much as $41.65 per share.
Therefore based on our best estimate RMO should be trading somewhere between $31.22 and $41.65. Let’s say it takes two years for it to reach the higher end of that valuation. That represents an average gain of 37.3% annually on a compound basis over those two years.
For most investors making an average return of 37% per share represents a very good ROI.
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.
