The stock of Romeo Power, Inc. (NYSE: RMO), a manufacturer of electric battery packs for heavy-duty trucks, has declined about 75% since early 2021, a sharper downturn than experienced by most electric vehicle (EV) stocks. At its current approximate US$800 million enterprise value, Romeo could represent a deep value play given the quality of contracts it has reached with truck makers.
For example, in April 2021, Romeo reached a long-term supply agreement with PACCAR, the manufacturer of widely used Kenworth and Peterbilt trucks, to supply battery packs and battery management systems for Peterbilt 579EV and 520EV refuse trucks in North America.
The accord runs through 2025; production is expected to begin after 2021. Kenworth and Peterbilt together represent about 30% and 22% of the heavy-duty and medium-duty truck markets, respectively, in the U.S. and Canada.
In 4Q 2020, Romeo reached a US$234 million multi-year production contract with Lion Electric, a leader in North American electric commercial transportation. The contract, which runs for five years beginning in 2021, spans Lion’s all-electric class 6-8 commercial trucks and urban buses.
Heritage Environmental Services, a private company based in the U.S. state of Indiana, and Romeo selected PACCAR, Lion Electric and Nikola as original equipment manufacturers (OEMs) which will participate in the Heritage-Romeo Power Fleet Electrification Program. Over the period 2022 through 2025, Romeo hopes to electrify 500 Battery Electric Vehicles (BEVs) purchased by Heritage. Romeo’s battery packs will be supplied to these manufacturers in the pilot phase of this program.
Cash-Rich Balance Sheet
Romeo projects full year 2021 revenue of US$18 – 40 million, up from US$9 million in 2020, but sales are constrained by the lack of supply of battery cells, a problem affecting a wide spectrum of players in the EV industry. As of March 31, 2021, Romeo had cash of US$287.5 million.
The firms operating cash flow shortfall was about US$24 million, so the company has a cash balance equivalent to about 12 quarters of its current cash burn rate. Of course, this cash burn rate should decrease noticeably as Romeo starts fulfilling the contracts noted above.
|(in thousands of US$, except for shares outstanding)||1Q 2021||Full Year 2020||Full Year 2019|
|Operating Cash Flow||($24,172)||($29,879)||($46,964)|
|Cash/Investments – Period End||$287,493||$292,442||$429|
|Debt – Period End||$8,858||$8,918||$16,125|
|Shares Outstanding (Millions)||130.5||126.9||74.4|
If procuring sufficient battery cells remains quite difficult for the EV industry for some time, it is possible that Romeo’s heavy-duty truck battery customers could attempt to amend the terms of their agreements with the company. In that case, the company’s financial prospects could be significantly impacted.
The demand for vehicle electrification continues to grow — for both passenger vehicles and medium- and heavy-duty trucks. Investors has been disappointed that Romeo’s revenues are not stronger in 2021, primarily due to battery cell supply chain issues. However, given the company’s portfolio of contracts with trucking industry leaders, it is possible that future results could be more robust. Furthermore, the company has nearly US$300 million of cash and little debt.
Romeo Power, Inc. last traded at US$7.75 on the NYSE.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.