Why Workhorse Group Isn't a Shoo-in for the USPS Contract

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Despite many other reasons to consider the investment narrative of electric delivery vehicle manufacturer Workhorse Group (NASDAQ:WKHS), it’s inevitable that most speculators have focused on its potential of winning the U.S. Postal Service contract to replace its aging long life vehicle (LLV) fleet. Certainly, recent news has bolstered the idea that WKHS stock is more than just a one-trick pony.

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Earlier this month, Workhorse won its largest delivery truck order, setting its 2021 off on the right note. According to Trucks.com, the specialist electric vehicle manufacturer stated that “Pride Group Enterprises will buy 6,320 C-Series all-electric delivery vehicles. The deal with the Ontario, Canada-based truck leasing and sales company is split between Workhorse’s C-1000 and C-650 models and is subject to various production and delivery conditions.”

Not surprisingly, WKHS stock jumped dramatically higher on the news. On a year-to-date basis, shares are up over 26%. Better yet, the disclosure provides stakeholders substantial confidence that management isn’t banking on any single contract materializing. Instead, the executive team is busy evangelizing the benefits of EVs to replace combustion-engine based delivery trucks and vans.

As you know, combustion vehicles aren’t the most efficient transportation platforms. But this fact becomes extremely obvious under stop-and-go driving conditions. The constant acceleration and deceleration, combined with extended periods of sitting still, contributes to the last-mile problem in logistics. Basically, it’s the last leg of a parcel’s journey that is the costliest.

To cut down on that expense, Workhorse has proposed an all-electric solution. Indeed, it’s the only company among the three contests vying for the USPS contract – the others are Karsan and Oshkosh, which are teamed with Morgan Olson and Ford (NYSE:F), respectively – that is all-electric. Hence, many are excited about the possibility of WKHS stock as the underlying company is the greenest.

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However, the USPS must also think about another kind of green (the economical variety), which makes the Workhorse narrative complicated.

Why WKHS Stock Might Not Be the Frontrunner

Throughout much of last year, WKHS stock was the beneficiary of speculation that Workhorse will get the governmental greenlight. There are myriad factors that bolster this assumption. One of them is growing public sentiment toward clean energy solutions. Further, because EVs have fewer moving parts, they are more reliable, all other things being equal.

Plus, USPS delivery vehicles go through a lot, covering vast amounts of terrain across different environments. In terms of overall savings, the native attributes of EVs – such as regenerative braking – make the platform compelling for last-mile solutions. Combined with zero emissions, WKHS stock seems the no-brainer proposition.

Except the problem is that Workhorse is a “brainer” as evidenced by the USPS delaying the contract decision to sometime in the second fiscal quarter of 2021, or the first quarter of 2021 in calendar terms. Therefore, by the end of March, we should get a decision.

However, this is not the first time that the USPS has delayed this program – not by a long shot. And the more this is delayed, the likelier that WKHS stock is in trouble relative to the sentiment effect.

Considering that the current LLV dates back to 1987, the USPS cannot just think about the immediate sentiment. It must take into account all factors, including reliability and dependability throughout the whole U.S. landscape.

Here, the EV platform, while offering myriad benefits, also has multiple questions. For instance, EV usage data indicates that EVs driven in hot temperatures degrade their batteries conspicuously more than vehicles driven in temperate climates.

Eyeballing the data, it looks to me that there’s a 7% degradation difference. Personally, that’s not much. At scale, 7% could mean a world of difference for a fleet owner like the USPS.

As well, EVs have certain technological eccentricities that require a different approach throughout the manufacturing process. For instance, GreenCarReports.com states that EV tires are different from standard counterparts because they must accommodate the extra load of heavy battery packs. That could add more cost over the intended long life of these next-generation delivery vehicles.

Combustion or not, tires do not last forever. And they are not cheap to replace.

Why the Selling?

Beyond the question marks over the USPS contract, a report from GuruFocus.com notes that Workhorse insiders, including CEO and president Duane Hughes, have been selling their shares of WKHS stock. It appears that the last time an insider was bullish was in 2019. Is this something investors should be worried about?

Unfortunately, it’s difficult to say. Executives can sell their stake for a number of reasons. Perhaps they want to buy a new place or the latest exotics from Ferrari (NYSE:RACE). Selling doesn’t necessarily mean bearish. On the other hand, buying shares usually indicates confidence and it’s peculiar that there is a dearth in this avenue.

I wouldn’t base your entire decision of WKHS stock on the insider selling. However, I think if you’re profitable on the company, you may want to mitigate some risk by taking some gains off the table. When you consider other angles, Workhorse might not have the inside track to the USPS contract as previously hoped.

In addition, sentiment was baked into WKHS with contract-winning assumption. Even though Workhorse has other encouraging revenue channel opportunities, a disappointment with the USPS will almost surely hurt its shares in the near term.

On the date of publication, Josh Enomoto held a long position in F stock.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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