What happened
Shares of embattled electric truck start-up Lordstown Motors (RIDE 1.11%) opened sharply lower on Tuesday, after a prominent Wall Street analyst cut his bank's rating on the stock.
As of 10 a.m. EDT, Lordstown's shares were down about 8.1% from Monday's closing price.
So what
In a note released after the U.S. markets closed on Monday, Morgan Stanley auto analyst Adam Jonas cut the bank's rating on Lordstown to underweight, from equal weight, and lowered its price target for the shares to $2 from $8.
Jonas wrote that Lordstown has agreed to sell its Ohio factory to Taiwanese manufacturer Hon Hai Precision (HNHAF 16.87%) (better known as Foxconn) at a substantial discount: The sale price, $230 million, is less than 20% of his estimate of the plant's true value. The clear implication is that the company didn't have other options.
Lordstown's deal with Foxconn brings in some much-needed cash, but it doesn't address the company's biggest issue: Its product probably isn't competitive. Image source: Lordstown Motors.
More broadly, Jonas wrote, at its recent price above $6 per share, the market is assuming that the deal with Foxconn will close, that the Endurance pickup will go into production and generate positive free cash flows, and that Lordstown will be able to do at least 50,000 units of volume on a new platform from Foxconn at an average selling price around $50,000 -- all of which now seems highly speculative at best.
Now what
Back in August, I wrote that Lordstown appeared to be running out of options. I think that the sale of the factory to Foxconn is probably the best play that new CEO Daniel Ninivaggi had, but it doesn't address the biggest issue: The company's sole product, the Endurance electric pickup, is still months away from full production and doesn't appear to be competitive with giant Ford Motor Company's upcoming F-150 Lightning.
While Ninivaggi might still have a card or two up his sleeve -- using the cash from Foxconn to buy time to revise or redo the Endurance, for instance -- I still think auto investors would be wise to give Lordstown's beaten-up shares a pass.
