What is WKHS? What do they do?
Workhorse is based in Cincinnati, Ohio. It was founded in 1998, but didn’t take its current from until 2015. It manufactures electric delivery vans
, intended to be used in city for last-mile delivery service. It’s a business-to-business play, not business-to-consumer. The company also owns a 10% stake in Lordstown Motors Corporation, which focuses more on consumer electric vehicles, and Lordstown revealed its electric pickup last week. That 10% stake alone could be worth $1B+ in the future. Details of the contract between WorkHorse and LordsTown are explained in their Q4 2019 ER
. It was just added to Russell 3000 index today.
So it’s just all the electric cars hype bubble right?
Yes, and no. The hype in electric cars definitely helps with the stock price surge, and the recent addition of SHLL adds to that. But unlike NKLA, WKHS has been making and selling products for a while. It initially delivered vans to UPS back in 2015, and has been receiving orders and delivering vans since then. It currently has pending orders for 1000+ vans from UPS, with plan to deliver 300-400 vans in 2020. The recent surge in stock price was the run-up and result of its vans passing the federal safety tests
. So the company actually has proven products, selling to customers in growing field of delivery as a byproduct of e-commerce boom. They also actually had positive earning for last quarter.
What about competition from TSLA, NKLA, and self-driving?
Unlike long-haul semi’s, last-mile delivery is the hardest to automate due to city driving and the need for dropping off package. They are also working on the one method that could somewhat automate the task, which is drone delivery
. So WKHS is less vulnerable from competition of automation, because it will be the last part of the delivery process to be automated, and it’s working on its own automation solution.
Anyone else doing this?
Yeah, Rivian is also in the electric van business, and has an order from Amazon for 100,000 vans
. It’s unfortunate that WKHS won’t be getting Amazon business, but Amazon going electric last-mile also proves the business model and advantage of all electric last-mile delivery.
Without Amazon, who else is WKHS going to sell to???
US-motherfucking-PS. USPS is looking to replace its aging fleet of mail trucks. There is a $6.3 billion contract
up for grab, for 180,000 vans to be supplied over the span of 5 to 7 years. There are currently four teams bidding for the contract (Ford & Oshkosh, Karsan & Morgan Olsen, Mahindra, and Workhorse) and USPS has finished test driving their prototypes. USPS may award the contract to a single company, or split it up. Workhorse is one of the two teams offering full electric solution. With Amazon and UPS going full electric, USPS would be wise to go that way as well. Economically, full electric would make the most sense, but if politics comes into play, that may favor the traditional ICE’s offering by Ford. The bid deadline is July 14th, and result on who is/are winning the contract is expected in fall.
It has ran up so much. I missed the boat!
Well, maybe. WKHS is still under $1 billion in market cap. If it wins the $6.3 billion contract, it will easily be worth multi-billion right away. Rivian is valued at $5 to $7 billion with the Amazon contract under its belt, plus a consumer play. If Workhorse wins the full, or even partial USPS contract, the stock could easily be at $20.
What’s the play then?!?
I see two approaches. July and August calls for the current hype, and potential run up to July 14th, or Oct and Jan calls to hold through the USPS decision. Or shares would work too. The company has huge long term growth potential beyond the current hype.
So it’s free money? Tits up it cannot go?
Well, with the shorter term play, if you bought in at a run-up with high IV, you could get IV crushed, or the hype could die down for electric cars. The longer term play to hold through USPS decision could potentially be very profitable, but there is also risk of them not getting the contract. Personally I have July and August calls
, but will add to Oct and Jan calls, and also looking to roll the July and August calls over to Oct and Jan. Investor Presentation Additional DD
Update 7/1/2020: BTIG upgraded the price target from $10 to $26.
Analyst Gregory Lewis at BTIG reiterated his buy rating on the electric van maker’s stock but boosted his price target to $26, which is 77% above current levels, from $10. Lewis said a key takeaway from a call he hosted with management on Tuesday was that the company has “first-mover” advantage, which was solidified when the Series C van received final regulatory safety approvals, giving the company a 1-to-2-year head start on other electric vehicle (EV) last-mile delivery competitors. He said this should allow the company to secure a revolving credit facility, which would allow it to scale up operations. Lewis said a major potential catalyst could be a $6 billion to $8 billion contract from the U.S. Postal Service, in which bids are due later this month, and an announcement of the winner is expected later this year. He said another bullish factor is the optionality around the company’s 10% equity stake in Lordstown Motors Corp., which unveiled its EV Endurance pickup truck last week.
Update 8/3/2020: Lordstown Motor is going public through SPAC with $DPHC
, at valuation of $1.6 billion. This puts the 10% stake WKHS has in Lordstown at $160 million. WKHS is up 23.6% today. USPS decision is still due in fall.
Earning report will be on 8/10/2020 10 AM Eastern time. So any changes in position you'd like to do needs to be done tomorrow. I will reduce the number of my 8/21 calls if we get a good pop tomorrow. I personally don't expect ER to be a big factor in volatility, because whatever amount they may or may not earn will be small in comparison to the impact of the USPS contract, or whatever news and progress they may decide to report. So I expect IV crush on options to be less compare to a regular company. But that doesn't mean the stock can't fall if people aren't impressed with lack of new progress.
They had positive earnings for the past two quarters. Income from Q4 2019 was mostly from technology licensing to Lordstown and (partial?) divestiture of their drone technology. Net income was $655k for Q4 2019. For Q1 of 2020, they had $13 million income from interest due to warrants and change in value in convertible note (due to stock price change). So even though they had positive earnings, not much was from actual sales ($84K in Q1 2020). I think they've delivered just a couple of vehicles so far, with bulk of the delivery of 300-400 goal for this year due in Q4. So I don't expect to see much income from sales for Q2 2020 either. The expected EPS for Q2 2020 is -0.11. Today on CNBC
, the CEO mention that the USPS decision was originally outlined be about 90 days after the bid submission. So if all goes well, the decision shouldn't be later than the 10/16 option date. It could come sooner of course. Oh yeah, if they don't get the USPS contract, the stock will probably take a huge hit, so be warned about the risk.
Update 8/7/2020: USPS is not in a great financial shape
. They'll probably get funding increase, unless Trump throws a fit about mail-in ballots and try to get in the way of that, but this may delay the decision on granting the contract or reduce size of the contract. It may be a good idea to reduce position size and roll options out to Jan 20201 and beyond. This doesn't change potential of WorkHorse as a company, but options right now priced in a potential vast increase in the stock price from winning the contract, so the IV and theta bleed of near term options may not be worth it anymore.
Update 8/12/2020: This article
suggests that there isn't any interruption with the USPS project and it's being worked on. It may take longer than I initially thought, maybe up to October, for any resolution.
LordsTown Motors made appearance on both DNC
. The RNC appearance was a whole short segment specifically on how Trump is creating jobs in LordsTown. Now WKHS isn't the same as LordsTown Motors, but they are also in Ohio, and if they were to get a big part of the USPS contract, they would likely contract out LordsTown for part of the production, since LordsTown has the larger plant. Initially I was afraid of Ford's political connections and maybe the current administration isn't EV friendly. But these recent events eased some of that worry, because it confirmed the theory that WKHS and LordsTown may even be politically favored, due to the spotlight on Ohio.
If they're going to use the USPS contract as a political tool to "buy" Ohio, they would want to do it early enough so that it can affect people who vote early, so likely it wouldn't be dragged out to end of October. The October 16th options have a good chance. Jan ones would be the safest though.
Someone on Twitter looked into announcement dates on past USPS contracts
. The ones they listed all were made public in September. I don't know what portion those are, compare to all past USPS contracts awarded, so it's not a sure thing. But it does suggest good chance of the decision being announced in September. September will be the end of fiscal year, and timing would work for political boost mentioned in the previous update. A good point he made is that the delay of the project last year was also announced in September, because they knew they couldn't accommodate it by end of 2019 fiscal year. There could also be another announcement of delay this September as well, and that would send the stock down. I'm hoping the administration will push it through in an attempt to win Ohio. Likely whether win, lose, or delay, we'll find out in September. I'm going to start buying up puts to cover my call losses as well, in case lose or delay happens. The upside on the calls is enough to justify a good amount of put insurance.
There was a negative article about its drone today
. The stock was trying to break out of a local wedge before the article came out. The drone program currently doesn't have too much weight in the company operations and valuation, but it was just another momentum breaker. The chart
is in a big pennant since the initial July pop. I made good profit trading that bounce on the 24th where the local wedge met bottom of the pennant. I have a lot of 9/4 calls on top of my longer calls going into Monday, hoping for another bounce there, or maybe a small chance of the decision being announced at the start of September.
I got that bounce I was looking for from the news about partnering with Hitachi
. This bounce took us out of the upper bound of the pennant, and it found support there during the day. It remains to be seen whether this bounce sticks.
We finally reached new ATH today after two months. There have been positive news scattered throughout the past week or so that I haven't been bothered to update the thread on. Oppenheimer began a coverage with buy rating with price target of $23, a couple of positive articles, and etc. No groundbreaking news yet. Today's big surge was partly due to NKLA's news of GM buying 10% (11%?) stake. It probably helps that we broke out from the big pennant and found solid support at the upper bound of pennant. People that have been watching on the side are stepping in to buy. Trading with the chart
has been pretty successful for me. Of those past 3 reaction points circled in red, I've been able to get in with weekly calls and making a lot of profit on the bounce. I took a lot of profit around $22 today, then at $23, since I didn't expect that price to stick. It bounced pretty convincingly off the previous early Aug price of 20.66, even with the heavy general selling of the market. It has usually faded pretty hard after runs like this, so we'll see if the $20+ price holds.
There has been consistent insiders selling stocks
in the past months. It could be that the value of the company has been so low for years that they’re taking this chance to reap some reward and don’t want to weather the risk of the contract decision. But it’s not a good visual. I will be limiting my exposure going forward.
We're still running, on hype alone.The recent breakout is in a giant rising wedge, and there would potentially be profit taking at $30, if we get there before USPS decision.
More thoughts on the insiders selling. Other than Benjamin's 24% sale, others selling around single digit to low double digit percentage of their shares is probably understandable. They know the company isn't worth $3 billion currently, without the USPS contract, and they're millionaires on paper, so they're taking some money for their years of work to take care of their family. I think the % of shares they sold is quite acceptable, and I would have probably done the same in their position.
Profit taking did start at $30 as I mentioned in the last update. What I didn’t realize was that the TSLA battery day probably was a factor for the run in the past few days. After all, if there was battery breakthrough, that’s good for all EV. But seems like the battery day did not meet expectation. We had general EV sell off today after Elon Tweeted last night to temper expectations. Judging by TSLA’s drop AH, we’ll probably get more EV sell off tomorrow. During the day, it broke the previous resistance turned support of $28, and we broke out of the big rising wedge we’ve been in, so it’s pretty bearish.
As bearish as the technicals are, a contract reward will rocket the stock back up regardless. I did pick up some calls at $27.5 that I’ll be down on tomorrow, as what I’ll hold through for rest of September for a potential decision, along with similar amount in puts. If there’s no announcement by end of month next week, there will be some serious selling, since many are expecting the decision to be made by end of September, the fiscal year.
September came and went with no USPS decision made. Many thought the decision would have been announced before end of the fiscal year, but that wasn't the case. Now people are pointing to October 13th, or 90 days since the contract submission deadline, as the date the decision might be reveal. This would line up with a source I saw which said it may take a couple of weeks after fiscal year ends for budget allocation.
There has been a lot of developments non-the-less. I'm going to be referring to u/vol_arb
comments a lot, as he has done much more research than I have. He pointed out an Office of Inspector General's report
made back in August on the progress of the USPS project. In essence, he has decoded the suppler lettering
in the report, which showed WKHS and Mahindra had many issues with prototype failures during the test. Although the report did mention that USPS did not give participants enough time to design and build the prototypes, so I guess failures in hastily assembled prototypes are understandable. Other participants had less failures probably due to using mostly proven existing designs, and more experience in general. Also, the criteria for evaluating suitability of the suppliers put WKHS at a disadvantage:
Specifically, production proposals will be evaluated based on the following criteria: (1) Design Quality and Technical Approach, (2) Supplier Capability, and (3) Past Performance. Total cost of ownership, technical evaluation results, and risk will be weighed.
A short seller, FuzzyPanda, has published a hit piece
on WKHS on October 8th. I thought the stock might get hit hard, considered what happened with NKLA, but it dove to about $22 pre-market then recovered. Here is vol_arb's thoughts
on why the stock shrugged off the report.
On October 9th, the stock started running on what I assume is Roth Capital's positive view
on WKHS's chance at the USPS contract. The story broke pre-market and the stock was moving up slowly until about noon. At first I thought other factor or news might be at play, but seems like it just took a while for that story to circulate. Another article came out AH essentially repeating the same thing, and that drove up the stock price even more in AH.
In summary, we may see a decision next Tuesday. While these findings with WKHS prototype issues and potential valid points in the short seller report reduces the chance of WKHS getting majority of the contract, they're probably not out of the running. I have 30x 10/16 $30 calls and 20x $20 puts.