Vernon, Calif.-based energy storage solutions provider Romeo Power, Inc. (RMO) went public one year ago through a reverse merger with blank check company RMG Acquisition Corp. However, shares of RMO have since slumped 87.1% due to its disappointing earnings report.

The company’s negative ROA is a cause for concern in this highly competitive capital-intensive industry. 

The stock is currently trading below its $4.24 and $6.59 respective 50-day and 200-day moving averages, indicating a death-cross downtrend.

So, here is what could shape RMO’s performance in the near term:

Lawsuits

Over the past few months, several class-action lawsuits have been filed against RMO’s directors and executives, alleging that they have violated the Securities Act of 1934 or breached their fiduciary duties. RMO’s key executives had previously stated that the company had vital partnerships with four battery makers and that its supply was hedged, and therefore did not forecast any significant challenges that would limit growth.

However, it was later revealed that the company had only two partnerships with battery suppliers, and not four. Furthermore, RMO faced an acute shortage in battery cell supply, causing its estimated annual revenue forecast for 2021 to be slashed by 71%-87%.

Substantial Doubt Regarding the Ability to Operate as a Going Concern

In its official prospectus, RMO stated that its independent auditors had expressed substantial doubts regarding its ability to continue as a going concern. RMO has reported recurring losses from operations over the past year and has a significant accumulated deficit. This, coupled with the company’s negative cash flows, raised concerns for the year ended December 31, 2021.

While RMO has funded its operations through business combinations and multi-year supply agreements over the past year, its trailing-12-month operating and levered free cash flows remain negative.

Poor Financials

RMO’s total revenues increased 753.2% year-over-year to $5.76 million in its fiscal third quarter, ended Sept. 30, 2021. This can be attributed to a 5,272.5% rise in Product revenues and a 383.8% rise in Service revenues.

However, the company’s operating loss widened 243.2% from the same period last year to $27.05 million due to a 230.4% rise in operating expenses. And its net loss doubled from its year-ago value to $17.95 million. Its loss per share came in at $0.13.

POWR Ratings Reflect Bleak Prospects

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

The stock has a D grade for Value and Quality. Its 45.52 forward P/E multiple is 100.3% higher than the 22.73 industry average, justifying the Value grade. In addition, RMO’s trailing-12-month ROA and ROTC margins are negative 30.12% and 35.21%, respectively, in sync with the Quality grade.

Of 64 stocks in the Auto Parts industry, RMO is ranked at last.

In total, we rate RMO for eight distinct levels. In addition to the grades I have highlighted, view RMO Ratings for Growth, Stability, Sentiment, and Momentum here.

Bottom Line

The ongoing semiconductor shortage and supply chain disruptions are expected to impact RMO’s operations adversely. In addition, analysts expect the company’s EPS to remain negative until at least next quarter. Also, the company’s poor cash flows might be further impacted due to the legal expenses. Thus, we think the stock is best avoided.

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

While RMO has an F rating in our proprietary rating system, one might want to consider looking at its industry peers, Genuine Parts Company (GPC), LKQ Corporation (LKQ), and Standard Motor Products, Inc. (SMP), which have an A (Strong Buy) rating.

RMO shares were trading at $3.85 per share on Thursday afternoon, up $0.36 (+10.32%). Year-to-date, RMO has declined -82.88%, versus a 29.56% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

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. More...

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