VOLAF - Reviewing Nikola's Partnership With Iveco

2023-03-13 11:56:32 ET

Summary

• Nikola and Iveco signed a partnership to build in Ulm, Germany, the Nikola Tre.
• Since 2019, things have played out much differently from the original plan and Nikola Tre BEV production has just started.
• Understanding this partnership is a way to understand how this joint venture can compete in a growing market.

Introduction

More than three years have gone by since Nikola (NKLA) and Iveco (IVCGF) signed their partnership to produce the Nikola TRE. At that time, Nikola seemed the disruptive "Tesla of trucks" and Iveco was still part of CNH Industrial. Since then, many things have changed and Nikola is now trading near its all time lows while having gone through different hurdles such as fraud charges for its former CEO, liquidity needs, production issues, and increasing competition.

In the meantime, CNH Industrial has separated its off-highway business, which keeps on being run under the same name, from its on-highway business, which now is a separate company called Iveco Group.

I have repeatedly covered the truck manufacturing industry, publishing my research on the following companies: The Volvo Group ( VOLAF ), Paccar ( PCAR ), Daimler Truck ( DTRUY ), Traton ( TRATF ), Iveco Group and Nikola.

Regarding the latter two, my take has been somewhat critical , since I have said that Nikola didn't seem to me the real go-to name in the industry for investors who wanted to play the electrification process. At the same time, I thought Iveco, though quite strong in Europe, is too small and not enough profitable to compete worldwide. However, I recently upgraded my rating on Iveco from sell to hold, in light of the recent results that have made the price recover close to its initial price after the spin-off.

A history of the partnership

On September 3rd, 2019, CNH Industrial and Nikola announced their intention to enter into an exclusive partnership for class 8 heavy duty trucks in North America and Europe through the adoption of fuel-cell technology.

When we read the full press release in hindsight, it is hard not to think at how Nikola has not turned out to be a company with a "disruptive business model", as the press release described it.

CNH Industrial also took a $250 million stake in Nikola as the lead series D investor. After the spin-off, this stake is now held by Iveco Group. In its 2022 Annual report we read that:

Equity investments measured at fair value through other comprehensive income mainly include the €52 million fair value of the approximately 5.0% investment held by Iveco Group in Nikola Corporation ("Nikola"), made in the context of the strategic partnership with Nikola to industrialize fuel-cell and battery electric Heavy-Duty trucks. During 2022, Iveco Group recorded in Other comprehensive income a pre- and after-tax loss of €172 million (a pre-tax loss of €95 million and an after-tax loss of €94 million during 2021) from the remeasurement at fair value of the investment in Nikola.

Therefore, Iveco has recorded a loss of almost 77% from its investment in Nikola. This is understandable, as Nikola has been harshly punished by the market. However, it is also true that, being at the early innings, this investment could still pay off if Nikola's operations and sales pick up speed.

Moving back to the history of the partnership, on December 3rd, 2019 we find another press release giving further details about the partnership.

IVECO, FPT Industrial and Nikola have adopted a modular approach in developing their electric offering for the European market [...]. Nikola’s fuel cell will be the starting point for the design of the electric battery, so that the Nikola TRE Battery Electric Vehicle (BEV) can be converted to fuel-cell technology. With this approach, the partners are taking the long view, bringing both technologies on stream now to pursue BEV and Fuel Cell Electric Vehicle (FCEV) in their offering in the next few years. This approach enables the partners to launch the Nikola TRE at the IAA 2020 exhibition and Nikola World 2020, delivering the first units to customers in 2021, while the FCEV will be available to customers by 2023.

Things were slowed down a bit and this is why we read in Iveco's 2022 Annual report that it was only at the IAA 2022 trade show that

the Company presented the Nikola Tre FCEV heavy-duty truck beta version (for European markets), the result of a joint venture established in 2019 between IVECO, FPT Industrial, and Nikola Corporation. The truck has a range of up to approximately 800 km. This first-generation vehicle is competing favorably in the toughest heavy-duty missions against very well established fossil diesel engines, despite the latter having powered many generations of vehicles over the course of more than a century

We also find in the same report that Nikola Tre BEV Artic 4x2's "first customer deliveries in Europe will start in Q4 2023" and that "the Nikola Tre Fuel Cell will follow after about one year with first deliveries forecasted for 2024".

In addition, Iveco has also inaugurated an ePowertrain plant in Turin at the end of 2022 to produce electric axles for Heavy-Duty Vehicles, such as the Nikola Tre.

During the IAA exhibition in Hannover, Germany, Nikola revealed some technical information about the European Nikola TRE just released. The company explained how the vehicle "has a wheelbase of 4,021 mm, features nine batteries with a total energy storage up to 738 kWh, which delivers a range of up to 530 km". The truck should reach an 80% charge in around 100 min at 350 kW. The e-Axle built by FPT Industrial has 480 kW continuous power, enough to perform applications such as hub-to-hub deliveries and regional hauling.

Compared to its other peers , the Nikola Tre BEV is the best one in terms of operating range (up to 350 miles). However, it has a nine 1,000 lbs battery packs that " eat up cargo capacity ", while the Volvo VNR Electric, for example, has six 600-volt battery packs and claims to have a range of 275 miles.

Regarding the Nikola Tre BEV, Nikola takes care of the cab's design and provides the infotainment system since Nikola has a "proprietary operating technology that integrates infotainment and navigation functions, as well as controls for most of the vehicle’s functions". Iveco, on its side, offers its mechanical and manufacturing know-how.

Considerations on the partnership

I think it is clear how the partnership works in terms of truck manufacturing. Iveco offers what we could generally call the engineering and manufacturing know how, apart from the engine. Nikola clearly takes care of the electrification process, together with the software and the design of the truck.

I view the way the two companies split up the work in two ways.

On one side, it is a smart move from Nikola's standpoint to use the manufacturing know-how of a well-established European player. In fact, Iveco provided Nikola with an important manufacturing facility in Ulm, Germany. This enables Nikola "to learn" the manufacturing process from a former competitor. Secondly, Nikola could ask none other than Iveco because the other major players have already their own electric trucks and thus have no interest in partnering with someone else, especially it is a new competitor.

On the other side, this partnership also highlights two companies that were not ready by themselves to produce internally an electric truck. The fact that this partnership had some important delays in bringing to the public its first electric trucks makes me think again that the two peers are not as strong as they might have seemed in 2019. In the meantime, Volvo, Paccar and Daimler have all taken big steps towards electrified trucks and buses and are already delivering them in the hundreds and even in the thousands.

However, on Nikola's side there is a fact I have repeatedly pointed out in past articles: demand for BE trucks is far outpacing the current manufacturing capacity of the whole industry. Therefore, just by simply executing regularly and consistently, Nikola should be able to take a chunk of this growing market. The advantage Nikola has compared to its peers is that it won't need to cannibalize its ICE truck portfolio because it simply doesn't have one.

Conclusion

Last year I was a bear on Iveco due to its low margins and its regional footprint. However, the company has taken some steps to improve, even though it is still lagging behind its main peers. It is striking to read the annual report and see that Iveco considers its goal to be the 5th player of the industry. It is not exactly alluring for investors. The recent bid up in price (€9.2 a share on Euronext Milan) seemed to me a little bit generous for such a company, but it can reflect higher future expectations which may be met.

Nikola, on its side, recently published its Q4 and FY 2022 results with a net loss of $785 million versus the $694 million lost in 2021. In the meantime, the average shares outstanding increased by 43 million, more than 10% of the outstanding shares at the end of 2021. Nikola keeps also on burning cash and it finished the year with $233 million versus the $497 at the end of 2021. For a company that needs to grow fast, this wouldn't be a problem. But it is yet hard to see where all the efforts are going and what the working capital is actually generating.

During the earnings call , Nikola's management disclosed these long-term goals in terms of deliveries:

in 2026, we would anticipate sales of approximately 1,000 to 1,250 Tre BEV and 5,000 to 6,000 Tre fuel cell EV, for total truck deliveries of 6,000 to 7,250 units.

However, as far as I see it, Nikola seems yet unable to catch up with its competitors. For example, just in Q4 2022, Volvo delivered 886 fully electric vehicles and had an order intake of 1,481 units. Over the past year, Volvo delivered 2,194 vehicles and received orders for 4,892 units. So, Volvo is already close to what Nikola targets as its goal in 3 years. To me, Nikola seems to be able to gain some market share, but I see it difficult for the company to be the disruptive player of the industry for the simple reason the industry is already being built by others.

I have already written that it is hard to give a correct valuation of an unprofitable company. The only ratio I feel comfortable using is the price/sales and Nikola's is still quite high at 18. However, looking forward its price/sales is a 7.5, which is still high but much better that the TTM one.

SA readers may know I have a rule for my portfolio: no unprofitable company will ever find its place in it. For sure, Nikola's partnership with Iveco doesn't seem to be a game-changer. Nikola's outlook for 2023 is to deliver between 250-350 Tre Bevs and 125-150 Tre FCEVs in the last quarter of the year. So far, the company has failed to meet its scheduled targets so I am inclined to think that FCEVs deliveries will take place sometime in 2024.

Overall, I stick to my sell rating. True, the price is very low and it is also very volatile. But I honestly have some difficulty thinking about Nikola's long-term prospects as it seems like it could even go bankrupt soon, given its growing losses. At the same time, I think Iveco will be damaged by this partnership. My suggestion: there are much better investments in an industry that has long-term tailwinds .

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