June 16, 2020 - 12:39pm EST by
2020 2021
Price: 35.91 EPS 2.50 0
Shares Out. (in M): 56 P/E 14 0
Market Cap (in $M): 1,994 P/FCF 10 0
Net Debt (in $M): 784 EBIT 140 0
TEV (in $M): 2,780 TEV/EBIT 20 0

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Have you ever looked longingly at TSLA, SPCE, DKNG, or perhaps NKLA wishing your good sense of value didn’t preclude you from playing?  Well, you can.  I present WOR – underpinned by value, long a recovery in GDP, with a FOMO/Robinhood kicker. 

Company description:

Worthington Industries, Inc. (WOR) is a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products.  WOR’s manufactured metal products include: steel cylinders (pressure cylinders for gas storage; water well tanks; hand torch cylinders; propane-filled camping cylinders; helium-filled balloon kits; steel tanks; cryogenic pressure vessels for LNG) and, through its joint ventures, complete ceiling grid solutions; laser welded blanks; light gauge steel framing for construction; and automotive service stampings.



In 2015, WOR provided $2mm startup capital to seed Nikola Corporation (“Old Nikola”), a designer and manufacturer of electric and hydrogen trucks and powertrains.  On June 3, 2020, Old Nikola became a public company through a reverse merger with VectoIQ Acquisition Corporation (VTIQ), with the combined company now known as Nikola Corporation (“NKLA”).  Upon closing of this reverse merger, WOR disclosed in an 8-K on June 5, 2020 that it owns 19,048,020 shares of NKLA.


The Opportunity:

WOR is a small cap ($1.8bn marketcap), under-researched (only 3 analysts cover the stock) and generally under-followed company.  Based on NKLA’s closing price of $64.00 on 6/12/20, WOR’s stake in NKLA has a market value of $1.2bn, representing a staggering 66% of WOR’s marketcap.  While the market has now been informed of WOR’s stake in NKLA, WOR appears to be receiving shocking little credit for the value of this investment.  Consider that WOR’s closest peer group (RS, ZEUS, RYI, RUS CN, KCO GR) is -22% to -51% YTD, while WOR is -20% despite its $1.2bn investment gain.  Said differently, WOR’s market cap on 12/31/19 was $2.34bn; today it is $1.83bn despite the above $1.2bn investment gain.


There could be three explanations for why the market is not giving WOR more valuation credit:


1)      Few investors are paying attention to WOR as a small-cap, under followed company. 


WOR is off the radar screen of many investors given its small market cap and limited analyst coverage.  WOR has also been surprisingly un-promotional in advertising its venture capital success with its NKLA investment.  In fact, prior to WOR’s 6/5/20 8-K, WOR only mentioned its investment in Nicola on two occasions (fiscal Q3 earnings call on 3/26/20 and 10Q 4/9/20), but neither mention gave analysts an ability to determine the value of this investment.  While the size of WOR’s NKLA stake is now known, WOR management hasn’t yet provided any details as to its plans for this stake or how to quantify any potential tax leakage.  A complete absence of management guidance serves to limit the attention and magnify the discount WOR receives.  WOR reports fiscal Q4 earnings on 6/25/20, so management will certainly have another opportunity to elaborate on its NKLA investment and its plans for monetizing this stake.


2)      Investors believe WOR can only monetize its NKLA stake after the expiration of a 6-month lock-up.  Six months may be viewed as a “long” time horizon in uncertain times and guestimating NKLA’s value in 6 months is too challenging


Investors believe WOR cannot monetize its stake in NKLA until after 6mos because WOR disclosed that it “entered into a Lock-Up Agreement with Nikola which restricts [WOR’s] ability to, and the number of Nikola shares the Company may, transfer, pledge or otherwise dispose of, or agree to do so, for various periods of up to 180 days.”  However, if you read the Lock-up Agreement which was filed as an exhibit to their 8-K (https://www.sec.gov/Archives/edgar/data/108516/000156459020028445/wor-ex991_15.htm), it is disclosed that WOR can actually sell portions of its NKLA stake far sooner (5mm shares on 7/3/20 and an additional 7mm shares on 9/1/20).  The lock-up agreement also permits “distributions of shares of [NKLA] Common Stock to…. stockholders of [WOR]”.  Thus, WOR could monetize 63% of its position by 9/1/20 and/or could distribute its entire stake in NKLA at any time.  This is potentially a far more expedited exit time frame than the market appreciates.  This fact is perhaps even more significant given the difficulty in valuing and the volatility of NKLA shares; valuing NKLA shares in 6mos is a highly challenging exercise and if this realization can be accelerated (as the lock-up agreement allows), the discount factor applied to WOR’s NKLA stake should be substantially reduced.


3)      Investors fear WOR’s base business


In in-depth analysis of WOR’s business is worthy of a separate discussion, but WOR has 36% of revenue exposed to the auto sector; thus the fiscal 5/31/20 quarter will likely be challenging as it was for any company in the auto supply chain.  WOR’s share price performance YTD has traded in-line with the auto supplier group, which suggests that (1) investors are no longer looking backward at calendar Q2 quarterly earnings and are instead anticipating a cyclical recovery and (2) WOR’s in-line share price performance again suggests little NKLA value is priced in.




WOR’s base business can be valued off midcycle earnings.  Avg EPS during 2013-2019 was $2.61/share.  Assuming average historical P/E of 13.2x, this implies a value for the WOR base business of $34.43.


Valuing NKLA is clearly a more challenging exercise, so I will present a valuation range.  I also will conservatively assume full 21% capital gains tax (WOR has DTA NOL carry forwards of $16.4mm which I also ignore), although upside could exist if there are ways to minimize tax leakage.  At market for NKLA on 6/12/20, WOR’s stake is worth $963mm (post cap gains tax), or $17.35 per WOR share.  Given the spectacular run in NKLA shares since it became listed, a more conservative valuation might be to use NKLA’s share price at the time of its 6/3/20 merger ($33.97).  At this valuation, NKLA is worth $9.21/share to WOR (again, post tax).


So, the combined WOR base business + NKLA stake is worth $43.64/share (31% upside from WOR close on 6/12/20) if you assume no appreciation in NKLA shares from the date of its merger.  An upside case taking NKLA shares at market would translate to a $51.78/share value for WOR (56% upside).  Clearly, based on this valuation exercise, the market is giving WOR little credit for its NKLA stake.  As discussed above, I believe two upcoming catalysts will change this misvaluation: (1) WOR earnings call on 6/25/20 which will give management the opportunity to discuss its plans for its NKLA stake and (2) the underappreciated feature of WOR’s lock-up which allows WOR to monetize up to 63% of its NKLA stake by 9/1/20, rather than a full six months.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Monetization of NKLA shares

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