LEV - Lion Electric: A Hold Considering Financing And Profitability Factors

2023-09-26 02:37:16 ET

Summary

• Lion Electric has guided for lower capital expenditures next year, which is expected to ease the company's financing burden.
• But analysts have revised downwards their expectations of LEV's profitability in the near term and the long run.
• I continue to rate LEV stock as a Hold after taking into account factors like funding needs and profitability expectations.

Elevator Pitch

My rating for The Lion Electric Company ( LEV ) (LEV:CA) stock stays as a Hold. I am encouraged by the fact that Lion Electric's financing needs are less of a concern as evidenced by the company's decision to end the at-the-market equity program prematurely. However, there is uncertainty over LEV's path to profitability, taking into consideration the recent changes to consensus forecasts for the company.

Financing Is Less Of An Issue For LEV Now

In my March 2, 2023 initiation article , I highlighted my "concerns regarding the need for further fund raising" for Lion Electric. Recently, there have been indicators suggesting that financing should no longer be a major worry for the company.

Firstly, LEV redesignated Nicolas Brunet from CFO to president, as reported by Seeking Alpha News on September 11 this year.

In the company's announcement , it was emphasized that Nicolas Brunet will have "a focus on accelerating sales across the United States and Canada" in his new role as president, after overseeing "the completion of key financing transactions" as CFO starting at the end of 2019. The company's former "Senior Vice President, Strategic Initiatives", Richard Coulombe, is the new CFO.

It is possible to infer from the changes to Lion Electric's management team that LEV is placing a greater emphasis on business growth rather than company financing now by having former CFO Nicolas Brunet take on a new role as president.

Secondly, Lion Electric disclosed in its Q2 2023 results press release issued last month that the company "terminated its at-the-market equity program."

Notably, the at-the-market, or ATM, program was only due for expiry by the middle of the next year. As such, LEV's decision to end this program early shows the company's confidence in having the financial means to support its future initiatives. At the company's Q2 2023 results call , Lion Electric explained that it didn't continue with the ATM program because it already has the "flexibility to execute our growth plans for the foreseeable future."

Thirdly, LEV's capital expenditures are expected to decline substantially in the future.

When I wrote my initiation article for Lion Electric in early March 2023, the sell-side's consensus financial forecasts pointed to the company spending approximately $50 million on capital expenditures each year in fiscal 2024 and 2025. Analysts are currently projecting that LEV's capital expenditures will be much lower at $18 million and $20 million (source: S&P Capital IQ's consensus data) for FY 2024 and FY 2025, respectively.

The market's current consensus financial estimates are consistent with management guidance. Lion Electric emphasized at its second quarter results briefing that its "capital expenditures (for 2024) are expected to significantly decrease as our large project-related investments will be completed." LEV also guided that it expects to allocate $26 million to capital expenditures in the second half of this year.

As a comparison, Lion Electric has $52 million of liquidity as of end-Q2 2023 and raised $142 million of funds in July this year as indicated in its investor presentation slides. Therefore, LEV shouldn't have any issues funding its capital expenditures for the foreseeable future.

In a nutshell, Lion Electric isn't likely to engage in further financing or fund raising activities in the near term based on the various developments highlighted above.

But Lion Electric's Path To Profitability Remains Challenging

Lion Electric suffered from an EBITDA loss of -$9.7 million in the second quarter of 2023, and LEV is only expected to turn EBITDA positive by FY 2025 as per consensus financial forecasts sourced from S&P Capital IQ . It will take an even longer period of time to register positive net profit, as analysts estimate that Lion Electric will only achieve this milestone in FY 2027. Notably, the market's consensus full-year FY 2025 EBIT forecast for Lion Electric was revised downwards from +$116 million at the beginning of this year to +$34 million (source: S&P Capital IQ ) now.

In the short term, the sell side has an unfavorable view of LEV's progress relating to profitability improvement. For the past three months, four of the 12 analysts covering Lion Electric's shares cut their Q3 2023 bottom line projections for the company. During the same time period, only a single analyst raised his or her third quarter bottom line estimate for LEV, while the other analysts kept their quarterly net loss per share forecasts unchanged.

LEV acknowledged at the company's Q2 2023 investor call there are "more costs that we're undertaking" as "the Joliet plant ramps up", which "can cause some volatility" in its profitability for the near term.

Also, it is worth noting that the production facility in Joliet has an estimated yearly capacity of 20,000 units when it is running at its full potential. In contrast, LEV delivered 419 units in the first half of 2023 with an order book of 2,559 vehicles as of end-Q2 as disclosed in its investor presentation. In other words, the capacity of the new Joliet plant currently under construction is way above Lion Electric's deliveries and order book for now. As such, there is a meaningful risk of Lion Electric's medium- to long-term profitability disappointing the market, assuming that LEV's bottom line gets hurt by negative operating leverage resulting from below-expected deliveries in the future.

Concluding Thoughts

I still rate Lion Electric as a Hold, taking into account both positives and negatives for the stock. On one hand, LEV's outlook on the financing front has improved. On the other hand, the market has taken a more cautious view of Lion Electric's short-term and long-term profitability prospects.

For further details see: