Down a Whopping 80% in 2021, Should You Scoop Up Shares of Romeo Power?

Romeo Power, Inc. (RMO) in Vernon, Calif., manufactures lithium-ion batteries for commercial electric vehicles (EVs) in two segments: Romeo Power North America and Joint Venture Support. On December 30, 2020, the company went public through a SPAC deal with RMG Acquisition Corp. RMO’s enterprise value prior to the merger stood at $900 million.

Regarding this special purpose acquisition, RMO ex-CEO Lionel Selwood Jr. said, “We are very excited about completing our merger with RMG…At this inflection point, where regulation is driving electrification across the commercial vehicle industry, and adjacent sectors, Romeo Power’s energy technology is ready to meet the demand.”

However, RMO has declined 76.9% in price year-to-date, reflecting investor concerns over its declining financials and multiple changes in senior management. Selwood, who played a major role in RMO’s stock market debut, was replaced on August 6, following which the stock declined 26.8%.

Here’s what could shape RMO’s performance in the near term:

Lawsuits

Several class action complaints have been filed against RMO alleging misleading statements made and the understating of potential risks and supply constraints. In addition, shareholder rights law firm Robbins LLP and Lifshitz Law Firm are currently investigating whether RMO’s board of directors has violated its duties or federal securities laws.

The law firms allege that RMO misled investors by stating that it had four battery cell suppliers instead of two. It also allegedly did not state that the company didn’t have sufficient battery cell inventory to meet its production targets and end-user demand in 2021.

Declining Financials

RMO’s revenues declined 18% year-over-year to $926,000 in its fiscal second quarter, ended June 30. This can be attributed to a 31.4% decline in Service revenues. Its operating loss widened 456.7% from the same period last year to $29.72 million, due to an 834.8% increase in SG&A expenses. Its adjusted EBITDA loss increased 376.7% year-over-year to $21.60 million, and its net loss came in at $28.67 million, up 308.2% from the prior-year quarter. Its loss per share increased 144.4% from its  year-ago value to 22 cents.

Weak Balance Sheet

Despite having a $267.68 million cash balance, RMO’s trailing-12-month total debt stands at $8.98 million, indicating negative net debt. While this is considered desirable, RMO’s negative cash flows raise concerns regarding its debt repayment capabilities. Its trailing-12-month net operating cash outflow came in at $65.31 million. In fact, RMO’s net operating cash outflow increased 425.1% year-over-year to $43.76 million for six months ended June 30.

RMO’s current and quick ratios are 11.26 and 10.50, respectively, indicating inefficient use of short-term resources.

POWR Ratings Reflects Bleak Prospects

RMO has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an F  grade  for Sentiment, and D for Value. Analysts expect RMO’s EPS to remain negative until at least next year, justifying the Sentiment grade. In addition, the stock’s forward P/E ratio is negative, in sync with the Value grade.

Of the 68 stocks in the Auto Parts industry, RMO is ranked #64.

Beyond what we’ve stated above, we’ve rated RMO for Growth, Momentum, Quality, and Stability. Get all RMO ratings here.

Bottom Line

RMO, a tier-1 supplier of lithium battery cells, reaffirmed its revenue guidance of $18 - $40 million for its fiscal year 2021. However, RMO’s CFO, Kerry Shiba, stated: “I recognize this range may seem pretty wide based on where we are in the year” during the second-quarter earnings call. In addition, as an early-stage company, RMO plans to invest heavily in research and development and product engineering to strengthen its infrastructure, indicating a widening net loss. Thus, we think the stock is best avoided now.

How Does Romeo Power (RMO) Stack Up Against its Peers?

While RMO has an F (Strong Sell) rating in our proprietary rating system, one  might want to consider taking a look at its industry peers Gates Industrial Corporation (GTES), DENSO Corporation (DNZOY), and Bridgestone Corporation (BRDCY), which each has  an A (Strong Buy) rating.

RMO shares were trading at $4.96 per share on Friday afternoon, down $0.10 (-1.98%). Year-to-date, RMO has declined -77.95%, versus a 21.20% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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