Workhorse Group Looks Highly Undervalued And Under-Appreciated

We have owned Workhorse Group (Nasdaq: WKHS) stock for a while now and believe that market, chasing for fancier electric vehicle names, has still not fully acknowledged the value of the company, which may change as more investors look at the fundamentals.

In this note, we have tried to value different parts of Workhorse Group assuming a fairly achievable set of assumptions and the result suggest that the risk-reward tradeoff is quite favorable for investors.

We have written a detailed note about Workhorse in the past, which will provide a great introduction to the company if you are new to either the stock or the electric vehicle space. In this note, we are trying to gauge the extent of relative undervaluation of the stock, compared to Telsa (Nasdaq: TSLA) and Nikola Corp. (Nasdaq: NKLA).

How is Tesla valued?

We did this exercise to find out how is Tesla valued on 2024 numbers, making some basic assumptions, in our note on Tortoise Acquisition Corp. (Nasdaq: SHLL) yesterday.

Tesla Inc.      
       
 201920202021202220232024
Vehicles 367,656 496,336 769,320 1,077,048 1,400,163 1,750,203
  35%55%40%30%25%
ASP $54,268 $44,500 $40,495 $37,660 $35,777 $34,704
  -18%-9%-7%-5%-3%
       
Auto Sales ($B) $20 $22 $31 $41 $50 $61
Non-auto Sales      
Leasing, Svcs and Rest $5 $5 $7 $8 $10 $11
As % of Auto Sales25%22%21%20%19%18%
       
Total Revenue $25 $27 $38 $49 $60 $72
Adj. EBITDA Margin12%13%14%15%15%15%
Adj. EBITDA ($B) $3 $4 $5 $7 $9 $11

On some basic assumptions, like 1.7 million vehicles per year, $11 of revenue from non-auto sales, etc., our back of an envelope calculation suggested that Tesla can do almost  $72 billion of sales and $11 billion of adjusted EBITDA by 2024.

Tesla Inc. 
  
Market Cap. $279
Enterprise Value ($B) $284
  
P/ Sales 2024 3.9
P/ EBITDA 2024 25.9
  
EV/ Sales 2024 4.0
EV/ EBITDA 2024 26.5
For our internal use only

Based on of those numbers, Tesla stock is trading at almost 4 times expected 2024 sales and 26 times enterprise value to expected 2024 adjusted EBITDA.

How is Nikola valued?

If we do a similar analysis on Nikola, using the company’s projected sales and adjusted EBITDA numbers for 2024,

Nikola Inc.   
    
Shares outstanding (M)424.5  
Stock price $49  
Current Market Cap. $21  
Enterprise Value ($B) $20  
    
Co. Est. Sales 2024 ($B) $3.2Co. Est. EBITDA 2024 ($B) $0.2
P/ Sales 2024 6.5EV/ EBITDA 2024 94.3
For our internal use only

Nikola stock is trading at more than 6 times expected 2024 sales and more than 94 times EV to expected 2024 adjusted EBITDA numbers.

Where should Workhorse Group stock trade?

Best to understand Workhorse Group is to value the business as a combination of three assets,

  1. Core Workhorse Group operation
  2. 10% ownership in Lordstown Motors
  3. Other frontier technology investments

Value of core Workhorse Group operation

USPS contract: A lot has already been said about the USPS contract for next-generation delivery vehicles, for which Workhorse is one of the four teams expected to win and deliver the contract worth 186,000 vehicles. The news about the contract is expected soon.

Workhorse Group C-Series truck
Source: Workhorse Group

C-Series last-mile delivery: Amid all the chatter and excitement about USPS contract and Lordstown Motors stake, the Street has almost forgotten about the C-Series last-mile delivery trucks that the company developed in partnership with UPS, for which the company has orders at hand to deliver the trucks to UPS. The recent Advanced Clean Trucks rule passed by California may accelerate the demand for these trucks.

So how much is this business worth?

Workhorse Group     
      
 20202021202220232024
Vehicles 150 1,950 11,700 23,400 33,930
  1200%500%100%45%
ASP $50,000 $48,500 $47,045 $45,634 $44,265
  -3%-3%-3%-3%
      
Total Revenue ($M) $7.5 $95 $550 $1,068 $1,502
Adj. EBITDA Margin-45%-10%-4%6%12%
Adj. EBITDA ($M)-$3-$9-$22 $64 $180
Academic exercise. For our internal use only

Assuming the sales from USPS and C-Series trucks pick up over next 4-5 years and the company can sell 34,000 trucks per year while generating 12% adjusted EBITDA margins, our back of an envelope calculation showed that the business can generate sales of $1.5 billion and adjusted EBITDA of $180 million by 2024.

Worth noting that the current market size of last-mile delivery vehicles in the U.S. is close to 350,000 annually, most of which will need to move away from fossil fuels.

Workhorse Group   
    
Shares outstanding (M)87  
Stock price $20  
Current Market Cap. $1,740  
Enterprise Value ($B) $1,665  
    
Co. Est. Sales 2024 ($B) $1,502Co. Est. EBITDA 2024 ($B) $180
P/ Sales 2024 (TSLA) 3.9EV/ EBITDA 2024 (TSLA) 26.5
Potential Market Cap ($M) $5,838Potential Market Cap ($M) $4,768
Stock price $67Stock price $55
Academic exercise. For our internal use only

Based on those sales and adjusted EBITDA numbers, if the market decides to offer the trading multiple given to Tesla, the core Workhorse Group operation works out to $55-$67 per share.

Workhorse Group   
    
Shares outstanding (M)87  
Stock price $17  
Current Market Cap. $1,479  
Enterprise Value ($B) $1,404  
    
Co. Est. Sales 2024 ($B) $1,502Co. Est. EBITDA 2024 ($B) $180
P/ Sales 2024 (NKLA) 6.5EV/ EBITDA 2024 (NKLA) 94.3
Potential Market Cap ($M) $9,763Potential Market Cap ($M) $17,000
Stock price $112Stock price $195
Academic exercise. For our internal use only

Similarly, if we assume the above-mentioned sales and adjusted EBITDA numbers for Workhorse and the market decides to offer the trading multiple given to Nikola right now, the core Workhorse Group operation works out to $112-$195 per share. Yes, this may be indicative more of the hype build into the Nikola stock, but it does highlight the under-appreciation of the core Workhorse Group operation on the part of the market.

Value of Lordstown Motors Stake

Workhorse Group has a 10% non-dilutable stake in Lordstown Motors and the company will also receive a royalty fee for each electric pickup truck delivered by Lordstown.

Lordstown Motors has recently launched its Endurance truck, a $52,500 battery-powered pickup expected to hit the markets by late 2021. Endurance has a range of around 250 miles per charge, similar to Tesla’s Cybertruck, and the company has already pre-sold the first year of production.

Lordstown Motors    
     
 2021202220232024
Vehicles 2,000 12,000 16,800 21,000
  500%40%25%
ASP $53,000 $51,410 $49,868 $48,372
  -3%-3%-3%
     
Total Revenue ($M) $106.0 $616.9 $837.8 $1,015.8
Adj. EBITDA Margin-45%-10%-4%6%
Adj. EBITDA ($M)-$48-$62-$34 $61
Academic exercise. For our internal use only

How to value Lordstown is difficult, but if we assume a smooth production and sales ramp through 2024, a back of an envelope calculation suggests it is easy to see the business doing close to $1 billion in sales that can value the business close to $6.5-7 billion (Nikola’s current trading multiple), resulting in Workhorse share worth $600-700 million or almost $8 per share.

Value of other frontier technology investments

Workhorse Group Drone
Source: Workhorse Group Presentation

The company also has an active program to develop drones for delivering packages that can cut the cost of last mile delivery by 95% and can be integrated with medium-duty vehicles. Right now, the technology may look a bit too far into the future, but fully electric vehicles also looked the same just a few years ago.

How to value these technologies is difficult, but given how companies like Zipline, which has proven itself in the last mile delivery and raised capital at $1.2 billion valuation, are valued, it is safe to assume that the business does add a few bucks per share of value to the stock.

DISCLOSURE: This is purely an academic exercise for our internal use and we are NOT recommending buying or selling based on these projections. We own stock of Workhorse Group.

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