Workhorse Group (NASDAQ:WKHS) may not be able to recover quickly from the Feb. 23 announcement that it lost out to Oshkosh Defense on the U.S. Postal Service modernization contract. WKSH stock fell almost 48% after the news.
This is a huge blow. The contract was likely worth more than $6 billion to be paid over several years.
The announcement said Oshkosh Defense, a division of Oshkosh (NYSE:OSK), won the contract. The press release mentions an initial $482 million payout.
Impact of the Contract
The contract is part of a 10-year program to modernize the postal service’s fleet. It has more than 230,000 vehicles and Workhorse was hoping to win at least a portion of that contract.
No dice. There was nothing in the announcement about panning out some of the other companies. This tranche of the contract is for between 50,000 and 165,000 vehicles.
This contract was a major reason why WKHS stock had risen so far in the past year. In fact, as of early June 2020, WKHS stock was in the low $3 range. It had run up to top $41 by early February.
Unfortunately, now you will see analysts and others reassess the company’s real prospects without this potentially huge contract. It also does not do well for the company’s marketing and related prospects.
One very astute analyst, Edward Schneider, wrote an article in Seeking Alpha on Feb. 8 headlined “The Workhorse Bubble Looks Ready to Burst.” He pointed out that the company continued to post losses over the past year, including its most recent results.
They were even worse, in fact. Earnings for the three months ending Sept. 30, 2020, were a loss of $84 million compared to a year earlier of negative $11.5 million.
Schneider says the only thing that seems to have pushed WKHS stock up was the fear of missing out (FOMO). His analysis was very prescient. It serves to make investors more rational about their investment choices.
What to Do With WKHS Stock Now
This is a falling knife situation. You need to stay away from falling knives. You need to let things settle down, even if it means there will be a bounce back up in WKHS stock.
The reason is all aspects of the company’s prospects going forward need to be reanalyzed. I would wait for analysts to bring out both the good and the bad aspects of the present situation.
For example, the Workhorse bid for the postal service contact was the only all-electric vehicle bid among all the finalists. This might not fly, however, with the new Biden administration.
I suspect that the company will lobby the administration hard about this aspect of the contract outcome. After all, conversion to electric vehicles was listed as an administration priority.
Barron’s pointed out late on Feb. 23 that the next aspect to this saga will be what analysts say about this outcome. The majority, 57% of them, Barron’s says, had a “buy” recommendation on WKHS stock.
However, Roth Capital downgraded Workhorse stock after the postal service delayed the contract-award decision a couple of times.
Workhorse will report its earnings for Q4 and 2020 on March 1. The company might make a statement about the postal contract at that time or in the conference call with analysts.
But until then, I suspect that WKHS stock could trade sideways or even fall further as analysts and investors sell on the bad news. In these situations, it is often the case that investors sell first and ask questions later.
Most conservative investors will wait for the stock to become a bargain where all the bad news is already incorporated into its price. That could come when the stock has fallen to the point where it is below some tangible aspect of value.
Unfortunately, right now, WKHS stock has negative book value and more debt than its cash. Its $3.97 billion market value may still be way too high to sustain its present outlook.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
