CA - Lion Electric: Leading Electric School Bus Maker

Summary

• Lion Electric's electric school bus business has decent long-term growth prospects, considering that its current top line is equivalent to 1% of the TAM for North America's electric bus market.
• But it will be tough for LEV to expand its presence in the electric truck market rapidly, and there are concerns regarding the need for further fund raising.
• I have a mixed view of Lion Electric, which translates into a Hold rating for the stock.

Elevator Pitch

I assign a Hold investment rating to The Lion Electric Company's ( LEV ) shares. The key investment merit for Lion Electric is the good growth potential of its core electric school bus business in the long run. On the flip side, LEV has risks relating to dilutive equity financing and slower than expected growth for the company's electric truck business. Considering both the investment merits and risks associated with LEV, I have decided to rate Lion Electric as a Hold.

Company Description

Lion Electric refers to itself as a "manufacturer of all-electric medium- and heavy-duty vehicles" as per the company's media releases . LEV specifically highlighted in its investor presentation slides that the company boasts a "commanding leadership in the all-electric school bus space." Lion Electric also has the intention to further expand its presence in the medium- and heavy-duty electric truck product segment. The company also noted in its investor presentation that it has already completed the delivery of over 800 electric school buses and trucks since its inception.

Core Electric School Bus Business Has Long Growth Runway

I mentioned in the preceding section that Lion Electric claims to be a leading player in the electric school bus segment, and the company's claim is supported by the size of its order book and its early venture into this space. LEV has more than 2,000 electric school buses on its order book, and Lion Electric had started delivering electric school buses since 2016 .

Lion Electric achieved a trailing twelve months' revenue of $116 million (source: S&P Capital IQ ), which is mainly contributed by the company's core electric school bus business. This segment appears to have a long growth runway ahead, based on a comparison of LEV's revenue with its TAM or Total Addressable Market. The trailing twelve months' revenue registered by Lion Electric is roughly 1% of the $10 billion TAM for the North American school bus market as estimated by LEV in its investor presentation.

The estimated $10 billion TAM seems pretty reasonable. There is significant policy support for the development of electric school buses in the US and Canada, and one key policy is the United States Environmental Protection Agency or EPA's Clean School Bus Program which is offering $5 billion in subsidies for more environmentally friendly school buses in the coming five years. LEV mentioned at the Barclays ( BCS ) Global Automotive and Mobility Tech Conference on November 30, 2022 that the Clean School Bus Program alone could translate into the addition of "12,000 (electric) school buses over 5 years" based on its estimates. Assuming that the costs of manufacturing electric school buses continue to trend downwards, there could be further upside to Lion Electric's 12,000 units estimate associated with the Clean School Bus Program funding.

Expansion In Electric Truck Market Segment Will Be Challenging

At the Barclays Global Automotive and Mobility Tech Conference held in November last year, Lion Electric stressed that "a lot of our development dollars" is allocated to the medium- and heavy-duty truck segment, and it also emphasized that its goal is to "replicate the success we've had in the school bus market" with its electric truck business.

It is understandable why LEV has an interest in growing the company's electric truck business. In its investor presentation, Lion Electric disclosed that the estimated TAM for the US and Canadian medium- and heavy-duty electric truck markets is around $100 billion, which is 10 times as large as that of the North American electric school bus market.

But it won't be that easy for Lion Electric to gain a strong foothold in the medium- and heavy-duty electric truck market and ramp up volumes quickly. Notably, LEV currently has just slightly over 300 electric trucks (versus more than 2,000 electric school buses) on its order book.

The growth in the penetration rate of electric trucks is expected to be slow. A recent February 22, 2023 commentary posted on The American Council for an Energy-Efficient Economy's website highlighted that "high prices" (some of the electric heavy-duty trucks can cost up to half a million dollars) and "the availability of charging capacity" (heavy-duty trucks need more electricity for a single charge) have slowed the take-up rate for electric heavy-duty trucks.

Also, a larger TAM for electrics truck (as opposed to electric school buses) also implies stiffer competition. Tesla ( TSLA ), BYD ( OTCPK:BYDDF ) ( OTCPK:BYDDY ), and Ford ( F ) are among the automobile giants that are seeking to grab a share of the electric truck market. In comparison, Lion Electric is one of the pioneers in the US electric school bus market, and many of these automotive giants don't compete in this space.

Concerns Regarding Further Fund Raising

According to the sell-side analysts' consensus financial forecasts sourced from S&P Capital IQ , Lion Electric is projected to record negative operating cash flow of -$80 million and incur capital expenditures of -$93 million for full-year fiscal 2023.

LEV has continued to raise new capital through various means in recent months. On February 2, 2023, Lion Electric revealed that it has obtained C$28 million or $20 million in funds relating to the sales and leaseback for one of its properties. Earlier, LEV disclosed on January 17, 2023 that it has raised about $57.5 million with a recent public offering. At the Barclays investor event on November 30, 2022, Lion Electric highlighted that it has "$67 million of cash" and "$40 million available on the credit facility." In other words, Lion Electric should have sufficient liquidity to sustain its business operations and growth plans for the large part of 2023.

But the market's consensus financial projections point to Lion Electric spending around $50 million on capital expenditures annually in the next two years (2024 and 2025) relating to battery pack manufacturing and an increase in vehicle production capacity for its Joliet plant. As such, it is inevitable that LEV will have to engage in further fund raising in time to come. The risk of dilution associated with new capital raises will act as an overhang for LEV and limit its potential share price appreciation. As an illustration, Lion Electric's shares fell significantly on news of new fund raising activities in mid-December 2022.

Closing Thoughts

A Hold rating for LEV is warranted. I have a favorable opinion of the market leadership and growth outlook for Lion Electric's core electric school bus business. But I have a negative view of LEV's fund raising needs and the company's ability to compete in the electric truck market.

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