HYLN - Hyliion: Turning Bullish And Getting Ready To Buy (Rating Upgrade)

2023-03-11 02:57:08 ET

Summary

• Hyliion is moving to production and has 210 confirmed deposit-paid orders.
• Changes to the regulatory environment may add to the Hypetrucks sales pitch, making it a compelling buy for many.
• Hyliion has a pipeline of developments that could make its product a solution to the emissions problem facing the heavy-duty trucking industry.

I first wrote about Hyliion (HYLN) in August 2021; the article was decidedly bearish, and the stock was trading for $9.70. I wrote a second bearish article in February 2022, when the stock was $3.96. Today the stock price is $2.33, and I am turning bullish.

In my first article, I saw the ERX product as a problem. It is not zero emission and will cost far more than other LNG-powered class 8 vehicles. I expressed reservations about the Hyliion order book, I did not believe they were real orders (I still don't) and saw little value in the second product, the regenerative braking upgrade (I still don't). From a strategic viewpoint, I saw the ERX as being trapped in the middle without a compelling reason for fleet owners to buy it.

In the second article, I remained unconvinced by the product; little had changed in the regulatory environment, and Hyliion had not changed its offering. I also raised concerns about cash burn and suggested that if cash burn continued to grow at the rate it was in 2022, Hyliion would run short of cash. At this point, I became worried about the quality of the product, which was not selling. I included some anecdotal evidence that the ERX was not performing well, and it was unreliable.

I now believe these issues have been resolved, some by Hyliion and some by the market. The regulatory framework has moved on to make the ERX an attractive proposition, and Hyliion has acquired, by acquisition, new generator technology, which could make the ERX a market leader in the industry. Hyliion has over 200 confirmed orders with deposits paid, and it has spent 12 months testing and improving the reliability of its product.

Hyliion is now ready for success, I like buying at the bottom, and I think the bottom is here.

The product is now a solution

The Hypertruck ERX has its calling; it is a transition vehicle that will allow companies to bridge the gap between government and consumer requirements of lower emission environment-friendly operation before the necessary infrastructure for actual zero-emission trucks is in place.

The regulatory framework has moved on. In the Q4 earnings call , Thomas Healey ((CEO)) said that the ERX was on track for CARB (California Air Resource Board), EPA, and NHTSA funding and that the technology would qualify for the Inflation Reduction Act. The Hypertruck also allows for 75% of the ZEV credit. None of this was news; however, Healey discussed changes to the CARB's ACF (advanced clean fleets). The change will, in my opinion, drive sales of the ERX, he said

In a recent meeting, CARB confirmed that exemptions will not be offered to fleets if a near-zero emission vehicle, like a truck with the Hypertruck ERX powertrain is available to be purchased

This is a significant change. Previously, fleet users could apply for an exemption if the charging/re-fueling infrastructure was not in place.

Hyliion has a product Pipeline

LNG will power the initial ERX. However, the second iteration will be powered by a fuel-agnostic generator that can run on LNG or Hydrogen. For actual zero emissions, we must wait for version 3, which will use a Hydrogen fuel cell.

This path outlined by Hyliion makes the Hypertruck ERX a real solution that many trucking companies will buy.

Version 1 The Hypertruck LNG

The truck is currently in Winter testing and is way behind schedule. When Hyliion came to market, they guided to volume production beginning in Q1 2022 and 2023 sales of 16,500 units. I made it clear in my earlier articles that I did not believe any of it and doubted the validity of the order book, especially the 1,000 units to Agility.

The new guidance from Hyliion is more reasonable and backed up by deposits for 210 trucks that will, most likely, be delivered in Q1 and Q2 2024.

Healey addressed product reliability; he said

we're still in the middle of winter testing right now, and we're going to continue it on. Actually, we just have made some design improvements to the vehicle

followed later by

So you figure out where the weak points are. So, we're doing just that... have been learning were from water ingress, areas, things like that to improve connectors to improve designs of sheet metal...

Hyliion is still working to resolve issues with the design. However, the fact that they are upfront about it makes me believe that they can deliver.

The early adopters of the vehicle, "the founder's program," as Hyliion describes it, will get an enhanced and controlled level of service from the Dallas site. The first 200 trucks will all be delivered through Dallas in what the CEO described as a "white glove" level of service. Hyliion will learn a lot from this, and the customers involved will be confident to move on to further orders, assuming everything goes well.

Hyliion is not forecasting sales for 2024. I think any number of around 500 trucks would represent excellent progress.

ERX version 2: The Karno

The second ERX will use a fuel-agnostic generator using Karno technology (it can use Natural Gas or Hydrogen and 20 other fuels). The Hyliion drive train will remain unchanged, but the fuel tank and system must be changed. This will likely increase the vehicle's weight and complexity and reduce its range. The range reduction is my thoughts and is not from Hyliion. I assume they will need to put two tanks, one for each fuel, in the same space; hence, they will be smaller, but we will have to wait for the real specs before we know.

Hyliion bought the Karno technology from General Electric ( GE ), paying $22 million in stock and $15 million in cash. The deal includes the technology and the fifty-strong engineering team that created the system.

This ERX Version 2, the Karno version, is the primary driver of my rating change on Hyliion. It provides a clear path from the Natural Gas Powered ERX to a zero-emission vehicle. The Karno generator will fit the existing drive train. I do not know if they can retrofit it into version 1. It would future-proof the truck and likely be a significant sales driver. The Karno ERX has the potential to be a game-changer for the industry; it could be a vast market-leading seller and currently has no equivalent competition.

ERX Version 3: The Fuel Cell

The Karno is a big step toward zero emission, but still has a tailpipe. If Hyliion is correct, and I believe they are, that Hydrogen will be the future fuel of heavy-duty trucking, then the Karno is the product companies can use while the Hydrogen filling infrastructure is built.

Fuel cells provide zero tailpipe emissions. It is probably the only current technology that could power class 8 trucks this way. I was a big believer in Nikola ( NKLA ) when it brought its BEV truck to market; however, vehicle sales are not growing as I expected. BEV trucks are proving problematic for customers, and companies are not placing large orders. I have tried to look into this, but my research can only be considered anecdotal. I telephoned three companies that have bought BEV class 8 trucks; I did not manage to speak to senior people, and the chats were off the record. The three discussions were with individuals involved with fleet management; all three said they thought the company would not buy another BEV truck. They said the technology was too awkward, and it was challenging to schedule recharging. Two people said this led to the BEV truck often standing idle.

I like the Karno deal; Hyliion has brought the engineering in-house and acquired the IP. I wouldn't say I like the Fuel cell deal. Hyliion has teamed up with Hyzon , I wrote about Hyzon in mid-2022, describing their poor track record and poor competitive situation . Since that article, the company has withdrawn all of its financial guidance and said that its previous financial statements could not be relied on. Hyzon has been accused of fraud by at least two short sellers, and my article agreed with that assessment. This article by Henrik Alex covers the issues nicely .

I believe the tie-up with Hyzon is a strategic misstep and smacks of desperation. Two troubled companies joining forces is not the image Hyliion wants to portray, but that is how it looks to me. In my view, Hyliion should find another route to the fuel cell vehicle.

Finances

In my second article on Hyliion, I was very concerned about their cash burn. However, they have made significant improvements in this area. The graph below shows the forecast, actual, and the green line shows the amount of additional capital available relative to my projections.

I had assumed that cash burn would continue growing as Hyliion moved towards completing its testing and R&D phase. This impressive cash management and balance sheet protection has led to the following strong position.

The balance sheet gives Hyliion an estimated cash runway of approximately six quarters or the middle of 2024 at the current cash burn rate. As Hyliion moves to the production and sale of vehicles, then the current rate of cash burn will no longer be valid. I will update this when we have real figures to work with later in the year.

Conclusion

Hyliion is moving to the production and sale of Class 8 trucks. It has 210 confirmed orders that should be delivered in the next 12 months. Recent changes to the CARB guidelines provide a compelling case to buy the truck.

The Karno acquisition provides the next step in the evolution of trucking towards zero emissions. This technology could make Hyliion a real force in the industry.

The Technical chart below suggests a 5-wave down move may have been completed. That provides the opportunity for a significant move higher. I have not bought yet; however, if the low from January 6th of $2.05 holds, then I will begin to build a position. I will update you in the comments section as price action progresses.

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