Shares of Workhorse Group (WKHS) are under continued pressure on Wednesday after the U.S. Postal Service awarded a 10-year contract to Oshkosh Defense (OSK) to manufacture a new generation of U.S.-built postal delivery vehicles. Following the news, Oppenheimer analyst Colin Rush downgraded Workhorse to Perform, noting that he expected the company to get at least a portion of the contract. Meanwhile, several Wall Street analysts have raised their prices on Oshkosh's shares.
USPS NGDV CONTRACT: The U.S. Postal Service, or USPS, announced on Tuesday afternoon that it has awarded Oshkosh Defense, a wholly owned subsidiary of Oshkosh Corporation, an indefinite delivery, indefinite quantity contract to produce the Next Generation Delivery Vehicle, or NGDV, "the USPS's first large-scale fleet procurement in three decades."
"The competitively awarded contract allows for the delivery of between 50,000 and 165,000 vehicles over a period of 10 years," Oshkosh said. Oshkosh Defense will manufacture both zero emission battery electric vehicles and fuel-efficient low-emission internal combustion engine vehicles, "upgrading the USPS fleet to be increasingly sustainable." Under the contract, the USPS has committed to pay Oshkosh Defense $482M to initiate engineering efforts to finalize the production vehicle design, and for tooling and factory build-out activities that are necessary prior to vehicle production. Production of the next generation delivery vehicle is expected to begin in 2023.
Meanwhile, Workhorse Group said that after being informed of the USPS decision, the company has requested, pursuant to the bid process rules, additional information from the USPS and is awaiting a response at this time. The company intends to explore all avenues that are available to non-awarded finalists in a government bidding process. "As further updates are provided, Workhorse intends to share that information through appropriate communications channels to the extent that the company is permitted to do so," it stated.
OSHKOSH TARGETS UPPED AFTER USPS DECISION: Baird analyst Mircea Dobre raised the firm's price target on Oshkosh to $140 from $122, while keeping an Outperform rating on the shares. The analyst is positive on the company securing the NGDV contract from USPS, stating that his initial take is that the order could be a "notable contributor" to earnings while adding visibility and stability through the cycle. The deal will also help Oshkosh build a "proven high-volume competency in last-mile delivery vehicles," according to Dobre.
Citi analyst Timothy Thein also raised the firm's price target on Oshkosh to $130 from $100 and kept a Buy rating on the shares. While the analyst acknowledged that there are a lot of unknowns and the ultimate impact on Oshkosh can vary significantly as the USPS can order anywhere between 50,000 and165,000 units over 10 years, he senses that the margin prospects associated with this program have improved over time.
Noting that the win of a 10-year U.S. Postal Service truck by Oshkosh is "another feather in its cap" for the company's "evolving growthier story," Evercore ISI analyst David Raso raised his price target on Oshkosh to $133 from $120 and maintained an Outperform rating on the shares. The analyst believes the contract could add as much as 70c in earnings per share beginning in fiscal 2024. Oshkosh is in position to take share in the initial stage of aerial recovery cycle, has "strong exposure" to a potential U.S. infrastructure bill and management appears more willing to use the company's "long-time under-leveraged" balance sheet, he added.
Raymond James and KeyBanc also raised their price targets on Oshkosh's shares, while keeping Buy-equivalent ratings on the name.
POSTAL SERVICE CONTRACT LOSS: Meanwhile, Oppenheimer analyst Colin Rusch downgraded Workhorse Group to Perform from Outperform after the U.S. Postal Service announced it was awarding Oshkosh Defense a contract to manufacture its next generation of postal delivery vehicles. As one of the three finalists and the only U.S.-made battery electric vehicle offering, Rusch expected Workhorse to get at least a portion of the contract. He noted, however, that Workhorse continues to have 8,000 vehicles in backlog representing $600M-plus in revenue along with the potential royalty stream from Lordstown Motors (RIDE).
Rusch pointed out that with Workhorse missing the U.S. Postal Service contract entirely and facing a "choppy supply chain situation" due to COVID-19-related headwinds, he prefers to step to the sidelines. Estimates need to move lower with USPS trucks coming out and the availability of battery packs remaining challenging, the analyst added. He also believes the company's convertible debt "could prove cumbersome," even with its maturity in 2024.
Following the news, Roth Capital analyst Craig Irwin also lowered the firm's price target on Workhorse to $15 from $19, while keeping a Neutral rating on the shares. The analyst argued that the contract loss seems "highly unusual" as Oshkosh did not include an electric vehicle in its original bid, only showing the mock-up of a delivery vehicle with Ford (F) after quality checks indicated the Workhorse electric vehicle had been selected. Irwin expects Workhorse management to contest the award, but believes the process will likely take several months.
WHAT'S NOTABLE: While Ford has been rumored to have a piece of the contract between Oshkosh and the U.S. Post Office, with reports saying Ford would partner with Oshkosh by providing Transit Vans, sources with knowledge of the situation said that is not the case, Phoebe Wall Howard of the Detroit Free Press reported. Tom Quigley, vice president and general manager, government programs at Oshkosh, told the publication that, "We have teamed up with industry leaders whose proven sub-systems and components speak to the quality of the Oshkosh Defense NGDV offering. We will share more information about the supply base in the future." When asked about Ford, Quigley stated "The vehicle will be built from the ground up by Oshkosh to fulfill the unique needs of the postal service." Oshkosh did not deny Ford would play a role as a supplier, The Free Press said in its report on Ford's involvement in the USPS deal.
PRICE ACTION: In Wednesday morning trading, shares of Workhorse have dropped over 13% to $14.28, adding to steep losses seen in the stock on Tuesday. Meanwhile, Oshkosh has gained more than 6% to $116.27 after rising on Tuesday.
