The devastating U.S. Postal Service contract loss ended the speculation in Workhorse Group (NASDAQ:WKHS). WKHS stock peaked at $42.96 and then fell when the U.S. Postal Service selected another electric vehicle and gas-powered delivery truck supplier.
Hope arose earlier this month when Workhorse met with the USPS about the lost bid. But chances are high that the USPS will only explain to Workhorse why it lost the tender. The company is too young and has no track record to meet expectations.
WKHS Stock in Limbo
If Workhorse fails to find another big customer, its cash burn will threaten its existence. The lack of a USPS deal is a reminder to investors of the risks of relying on a sole customer for all the future business. From a green perspective, the USPS could have increased its use of electric-powered vehicles. Instead, the 50,000 to 165,000 vehicle orders are mostly internal combustion engine (ICE) vehicles.
Oshkosh (NYSE:OSK) will earn $482 million for its engineering efforts.
The USPS move is most daring. The U.S. government encourages and invests in clean energy electric solutions. But at least one environmentalist criticized the USPS. James R. O’Dea, Ph.D., senior vehicles analyst at the Union of Concerned Scientists, told Electrek, “Delivery vans are top candidates for electrification in terms of technology suitability and cost savings, let alone for much-needed reductions in vehicle emissions. A press release in 2021 that leads with combustion vehicles gives me pause.”
Government Stepping In
Workhorse shares did not plunge to new lows because of speculation that the government will step in. A re-evaluation of the bidding and selection process will give Workhorse investors hope.
Workhorse needs a small win to get its foot in the door. Without the experience in delivering a fleet of trucks, Workhorse risks insolvency.
In the fourth quarter, Workhorse reported an 8,000 vehicle backlog. It raised $270 million from financing, which would lower solvency risks in the short-term. Yet it also posted sales of just $652,000. This is up from $3,000 the year before.
The “other income” line item of $323.1 million “was related to the Company’s 10% investment in Lordstown Motors Corp. previously noted.”
Workhorse is not backing down from the lost USPS contract. In a March 4 press release, Chief Executive Officer Duane Hughes said, “Yesterday’s meeting with the USPS marked the first step in what we expect may be a prolonged process to explore our options and possibly pursue further action related to our NGDV bid.”
The effort will add uncertainty for investors. Workhorse could benefit from moving on and working on other deals. Still, the company continues to stretch the hope that it will get some business from the Postal Service. That would sustain the WKHS stock valuations in the $2 billion market capitalization range.
Workhorse has a strong quality score, as shown in the chart on the right. Net margins and return on assets are inflated, due to the revenue from “other items.” Still, the capital raise in the last year suggests that investors will continue to support Workhorse this year.
Workhorse is now a trading stock. Buying and holding on hopes of winning the contract it just lost is too risky. Investors are better off buying another electric vehicle or clean energy play. On the flip side, on Wall Street, the average price target is $21.50, according to Tipranks. SimplyWall.St has a $20.61 fair value target for WKHS.
Automobile manufacturers like Tata Motors (NYSE:TTM) or Winnebago (NYSE:WGO) have vastly different business objectives. They are less focused on the clean energy movement. Sometimes, traditionally boring but stable manufacturers are unattractive. In return, they are stable and provide predictable holdings for investors.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.