Workhorse Group's (WKHS) Wild Ride in the Electric Commercial Truck Derby
Tiny Ohio-based Workhorse Group tells a surprisingly convincing investing story in selling next-generation electric vehicles.
LORDSTOWN, Ohio: The road to electric commercial vehicles usually leads to interesting places. But this isn’t one of them. Tiny Lordstown is a nondescript village, sitting just a few nondescript exits west of Youngstown, on a pretty darn boring stretch of the Ohio Turnpike. Not many people are around. Lordstown’s 4,000 residents seem to prefer the hour-drive to Cleveland or Pittsburgh, rather than options, like the Ross Eatery and Pub or the Fear Forest Haunted House and Hayride.
News is not easy to dig up in here.
Yet, itty bitty Lordstown matters in the big global race to electrify commercial trucking. It is the home of the General Motors ginormous Lordstown Assembly Complex. This 6 million square-foot automotive plant is where many are betting the future of next-generation electric delivery vehicles will be built. Back in May, no less than President Donald Trump tweeted that GM would sell Lordstown Assembly to a tiny Loveland, Ohio-based auto parts maker, with skills in electric delivery vehicles. With just 74 full-time employees, the Workhorse Group found itself trapped in the President’s social-media planetarium: Its market cap jumped 200 percent, to something like $215 million. But the media glare forced back-peddling. GM issued a carefully worded statement that yes, the car giant was “in discussions” about a possible sale of Lordstown, but not exactly to Workhorse Group per se. Instead, GM was dealing with a group led by Workhorse CEO Steve Burns, with his firm eventually expected to hold a minority share in whatever company was created.
Workhorse then said it sold 63 new electric vans to logistics shop DHL; but that was countered by the dubious prospects for an electric pickup truck the company had tried to sell in previous years. That forced GM to fire back at critics of the Workhorse talks, as CEO Mary Barra met with politicos from Ohio and Michigan. When Workhorse announced it had raised $25 million, fears were calmed, until August, when Vice President Pence said that this financing was tagged for the Lordstown Complex purchase. That sparked yet another wave of speculation, forcing that report to be unpublished, and concerns that Pence was confused about where the $25 million would actually go.
Finally, in September, GM’s Barra had a face-to-face with President Trump, where the Workhorse-Lordstown deal might have been part of the conversation; but so was the President's dissatisfaction with many parties, including automakers, in general, the Mayor of London, and apparently Will & Grace star Deborah Messing.
There is nothing quite like a factory closing in a battle ground state during an election year, is there?
Smart Money Loads up on Workhorse
What matters to professional investors is that quietly over the past several quarters, professionally managed money has been testing fresh positions in Workhorse Group. On Sept 6th, the usually sober, Charlotte, North Carolina-based, Independent Advisor Alliance bet about $1 million in 375,000 shares of the company. And last quarter’s SEC filings indicate the usual suspect players, like Vanguard Group, Blackrock, Wells Fargo and T-Rowe Price have stakes in the company. Overall, increases in institutional holdings ran about 5 to 1 over decreases, with buyers outstripping sellers since the beginning of the year.
There is no question that the scale, bricks and mortar of the Lordstown complex give these investments fresh credibility. The buildings alone run about 6 times the size of the average Amazon distribution center. The 905-acre campus oozes unimaginable backbone infrastructure: There’s a test track, several major rail sidings, seemingly unlimited power and access to water and transportation. Highway 80 runs right by the place, and right to pretty much everywhere in the Americas. We’ve visited serious commercial farms that are smaller and not as well positioned.
Yet, the scale alone does not capture the sense of leverageable narrative in Lordstown. This place means something to car people. The factory was originally raised from farmland back in the 1950’s when the Interstate first cut across Ohio. Lordstown quickly became the mechanical backbone for mid-sized models like the Chevrolet Caprice and Impala.
The manufacturing factoids can still be sensed in the night air here: More than 175,000! Impalas came off the Lordstown Assembly in 1958 alone. Those 500 cars made per day were 15 percent of the total production for Chevrolet that year.
But that’s not the critical story that Lordstown tells. This place is holy ground to the dark Upside Down narrative of American manufacturing: In the 1970’s, the factory was staffed by mostly young, draft-age workers who simply stopped listening to management. These mostly VietNam-era vets famously started building cars as they saw fit. They held nutty wildcat strikes. These wore bell bottoms. They sprouted beards. They got drunk. They got stoned. They partied like it was 1977. And not surprisingly, car quality declined.
Lordstown-produced vehicles emerged with almost incomprehensible quality issues: Paint didn’t match. Doors didn’t close. Engines parts weren’t there. The mayhem earned a name among management gurus like Peter Drucker, who dubbed it The Lordstown Syndrome.it would take until 2010 -- that’s an entire generation -- for the United Auto Workers to finally claim it’s members were “Lordstown Syndrome Free.”
Working Hard Against Tesla
Nobody can pretend that even after the last Chevy Cruze rolled off the line in Lordstown on March 6, effectively shutting the plant down, that Workhouse Group’s management doesn’t know the serious narrative game it’s playing. While Workhorse is officially managed by an automotive professional named Dan Shaw, the actual operation is managed by Duane Hughes. Hughes is not a car guy. He is not an engineer. He’s not a vehicle salesman. Hughes is a radio guy. Prior to Workhorse, he was chief operations officer for Cumulus Interactive, the global media and radio conglomerate. And prior to that, Hughes worked at newspaper powerhouse Gannett, spending 15 years in a similar key sales and operations role.
Workhorse is being run by a born storyteller looking for the next big tale to tell. And if the rumored sale proves true, Hughes will certainly have a narrative tiger by the tail in Lordstown.
At its most obvious, Workhorse is making a sensible investor argument as a small-cap, countercyclical alternative to stodgy enterprise-scale commercial trucking companies. As the economy cools, it is commercial trucking that is among the first to fade. Reasonable reports estimate commercial vehicle sales are down 80 percent from peaks set in 2018. This contraction is happening during a major restructuring in the making of cars and trucks. Ford Motor Company debt now carries a junk rating. Investors are wondering will commercial vehicle makers Daimler (DDAIF), Paccar (PCAR), Navistar International (NAV) and Volvo Group (VOLV) face the same fate. Workhorse makes a reasonable argument that. as a nimble operation, it can find a way to eventually grow while others can’t. It also doesn’t hurt that Workhorse stock is trading at $3.00, while Paccar is trading around $68.
But that fast-growth story is only half the narrative to Workhorse. The company has been carefully crafted to offer a compelling alternative to the other end of the commercial vehicle market: The disruptive electric vehicle start-ups that have been funded by massive bets from outside the car industry. Workhorse seems to challenge the near-nonsense Silicon Valley narratives, like Elon Musk’s battery making “Gigafactory” or Nikola Motors’ Hydrogen powered trucks. Workhorse made us ask, what exactly keeps a bunch of car and radio guys from picking up a factory on the cheap and making a pretty darn efficient electric truck? Not really much at all.
Converting a traditional truck to an EV is not hard: The chassis are big. The engineering is minimal. Follow this video and you can do it yourself for $600.
A Risky Workhorse To Ride
Are there reasons for institutional investors to fear Workhorse? Of course. Its financials are a mess! The last reported quarter saw $36 million in losses on $5.5 million of reported sales. The good news was, we suppose, it only took $11.8 million in cash to keep the lights on during that period. There are the larger risks that the rumored GM deal could fade. Customers may postpone going all-electric. History has not been kind to this stock. The ticker touched around $12 back at the end of 2016, but since tanked to the 25 cent range as various sales failed to materialize.
We want to be clear: Workhorse is nothing more than a speculation on the value of the relationships between an electric truck maker and its client logistics companies. But how much more speculative is that relationship than the likes of recent IPOs like Postmates, WeWork, Robinhood, Lyft, Pinterest, Beyond Meat or Uber?
What’s intriguing about Workhorse is most of the questions about the company could be puzzled out: What exactly does a logistics giant like FedEx or UPS think of electric vehicles? What are the real gains or losses in converting commercial fleets to EVs with limited range, but dramatically lower maintenance and fuel costs. What are the lists of products suited for EV delivery? What are the maps that could be drawn to visualize the geographic proclivity for EV vehicles?
Regardless, heading east on I-80 away from Lordstown, back to New York, there was something attractive about not having to rationalize a Star Wars story of Elon Musk reinventing the commercial truck. Why not start with enough space and time to produce a reasonable work vehicle at a reasonable price. And then let the market sort out the winners.
Workhorse is a story to watch for at least the next 6 months
