Workhorse Group Sets Up For Robust Rebound

Workhorse Group Moves Lower On Weak Q1 

The Workhorse Group (NASDAQ: WKHS) has had a wild year. The company rocketed to the top of the EV market last year when it went public, it soared to new highs when it became a contender for the USPS lucrative deal, and then it all came crashing down. Not because the underlying story in this company is faulty but because the price for the stock was so wildly overinflated. Yes, the fundamental story is still there but no, this company isn’t really making money yet but it will be, it will be. Workhorse Group started delivering its first vehicles last year and it’s now on the cusp of a major ramp in production. The company may not have hit the market’s targets this quarter but it’s only a matter of time until Workhorse Group starts hitting its stride. 

“We have had a step function improvement in production in the last month. Although we had planned to have achieved our year-to-date number of trucks produced sooner, we took the additional time to ensure that we were building top-quality vehicles for our customers while improving our production processes,” said Workhorse CEO Duane Hughes.

Workhorse Group Has Mixed Quarter 

The Workhorse Group is an example of something we’ve seen throughout the market this earnings cycle and a phenomenon that may keep some sectors from advancing much further: good (growth) companies with great results are not meeting the high expectation of analysts and have seen their share prices suffer for it. 

At face value, Workhorse Group’s 550% YOY increase in revenue is great news but a far cry less than what the analysts were expecting. The company’s $0.52 million in revenue is an improvement but fell short of consensus by $1.81 and not just because the company is taking “the additional time” to improve production processes. The global chip shortage, supply chain, and freight issues that are plaguing the market today put a crimp on production capability but are being worked out. The takeaway is the company delivered 6 C-series trucks in Q1 and had delivered 38 in the YTD period more than doubling its previous production combined and the ramp in production is only expected to accelerate. 

“Bottlenecks within the global supply chain and offshore shipping delays of commodity raw materials and components, as well as our initial stages of production, limited our capacity to produce during the first quarter. However, our vehicle production numbers in April in comparison to the last few quarters are encouraging as are the proactive steps we are taking to build our volumes and ensure consistent production.”

Earnings were mixed as well, the company’s loss widened over the past year but there is a mitigating factor here as well. Most of the loss can be attributed to non-cash impairments related to Workhorse’s stake in Lordstown Motors. The writedown is due to mark-to-market valuation that will improve as Lordstown ramps its production as well. 

Workhorse Guides Lower, Shares Fall 16% 

Workhorse gave a positive outlook on production and delivery for the year citing several new deals aimed at improving component supply and specifically batteries. The company is expecting to produce at least 1,000 C-series vans or 2500% growth over the YTD total. The bad news is the analysts were expecting more based on the previous guidance and that has shares moving lower. In our view, the guidance is weak but likely cautious in light of our expectations for the 2nd half of the year. Once the global reopening gets in high gear and component shortfalls are corrected we expect to see Workhorse Group’s production capability increase well above 1,000 vehicles annually and for that to be seen in this year's data. 

The move down in share prices is also due to short selling. The short interest on the stock was running well above 30% ahead of the release and a heavy load for the market to bear. While short-selling may keep pressure on the price in the near term, longer-term we see the high short interest as a catalyst for bottoming and reversal that could turn into a massive short-squeeze should the proper catalyst arrive. The indicators are showing a major divergence in MACD momentum and highly oversold conditions so a sharp uptick in prices and/or reversal becomes more likely by the day.