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Commercial Vehicle Group, Inc. (NASDAQ:CVGI) is a provider of systems, assembly, and components to the global commercial vehicle market, electric vehicle market, and warehouse automation market. With manufacturing operations located in various regions of the U.S., Asia, and Europe, the company provides customized products as per the customers’ requirements.
Truck manufacturers, construction vehicle manufacturers, and top e-commerce retailers have been the company’s primary customers. Therefore, the company’s financial performance is expected to depend on cyclicality in the truck and commercial vehicle industry.
Also, in the last year, to focus on growth-oriented capital allocation, the management has come up with a strategic reorganization of the business, which has separated its business segments into four categories: vehicle solutions, warehouse automation, electrical system, and aftermarket segment.
The vehicle solution segment – Focuses on manufacturing seats for global truck manufacturers and plastic components for commercial and recreational vehicle markets.
Warehouse Automation segment – Manufactures control panels, electromechanical assemblies, and Power & communication solutions for e-commerce and transportation-related customers.
Electrical systems segment – Mainly produce cable harnesses, control boxes, and dashboard assemblies for construction, agricultural and automotive manufacturers.
Aftermarket segment – Comprised of parts sold into commercial markets, which gives significantly higher margins than the other segments. And as per the management, it provides significant strength to the business model during cyclical fluctuations.
Share price (YCharts)
Furthermore, due to the cyclical nature of the business, it becomes difficult to find out the actual earning power of the company. Also, the profit margins have seen substantial fluctuations in the last ten years. As a result, the stock has yet to produce any significant returns from 2012 till now.
Also, buying the stock during its cyclical downturn has turned out to be highly profitable, but the current price seems significantly higher.
In my view, the Commercial Vehicle Group, Inc. stock price currently reflects a fair valuation of the business, and from this price point, it may not produce desirable returns to the investors. Instead, there comes a considerable risk of a cyclical downturn resulting from current adverse economic conditions that can lead to substantial price correction. Therefore, I assign sell ratings to CVGI stock.
Historical Performance
Revenue (macrotrends.net )
Historically, the business has remained very much volatile and has seen significant ups and downs in revenue; over the last ten years, revenue has fluctuated considerably from $857 million in 2012 to about $662 million and $971 million in 2016 and 2021, respectively. Such a significant fluctuation indicates that the business model is prone to industry-wide cyclicality.
Also, net profits have been considerably volatile, and till 2018 have not produced any desirable returns; instead, CVGI has suffered losses during cyclical downturns. And due to significant adverse conditions, the company had to dilute its outstanding shares; the investor must consider that during a cyclical downturn, profitability might be affected significantly, which might result in share price depreciation.
Over the period, management has been focusing on reducing debt. Still, due to a significant working capital load led by higher receivables and increased inventory, the total long-term debt has risen to $185 million. The company’s ability to maintain debt depends on working capital efficiency because a significant amount of capital has been used to increase overall inventory. And, in my view, as the supply chain issues stabilize, the company could be able to free up significant cash from working capital to pay down the debt.
Finally, the historical performance of the business doesn’t seem attractive. Also, the operating performance has been fluctuating significantly at nearly the same levels.
Strength in the business model
Our Commercial Arrangements with our OEM customers may provide for an annual prospective productivity price reduction. These productivity price reductions are generally calculated on an annual basis as a percentage of the previous year’s purchases by each customer. Historically, most of these price reductions have been offset by internal cost reductions and through the assistance of our supply base, although no assurances can be given that we will be able to achieve such reductions in the future.
As per the management, the agreement with OEM customers provides a prospective productivity price reduction. And over the period, the company has efficiently managed price reduction by cutting various costs, engineering changes, and productivity improvement, which has helped the company achieve significant profitability despite the effect of productivity price reduction.
Also, as per the customers’ requirements, the company manufactures modified products in low volume, and in such cases having flexible manufacturing capacity helps the company comply with various customers. This further strengthens customer loyalty and long-standing relationships.
Furthermore, over the period, management has focused relentlessly on improving business efficiency and cost-effectiveness. As a result, the company could provide advanced technology products at a competitive price.
Risk factors
Due to the robust business model and low-cost operations, I do not see any significant long-term threat to the Commercial Vehicle Group, Inc. business model. Still, due to its cyclical nature and current inflationary environment, the stock price can drop or might not produce desirable returns from this price point.
As the automotive component industry is intensely competitive, any increase in competitive pressure might reduce the company’s margins. In such a case, the stock price might drop significantly.
Recent developments
Quarterly results (Quarterly report)
In Q3 FY 2022, the revenue has grown despite significant headwinds from $139 million in the same quarter last year to about $251 million to date, led by higher volume and favorable pricing. But the profitability has dropped significantly due to increased labor costs, raw material costs, and freight costs.
Also, the management has focused on a vertical integration and reorganization plan, expecting to drive higher cash flow and improved competitiveness, which might improve the margins.
Furthermore, the company has been developing an e-commerce aftermarket business expected to launch by early 23, which might help the company increase revenue in the upcoming years.
Currently, Commercial Vehicle Group, Inc. has been trading for $216 million, whereas it has produced approximately $10 million in net profits in the last nine months. The company has been trading for 21 times its nine months’ price-to-earnings ratio. Also, consider that the historical earning power of the Commercial Vehicle Group, Inc. business seems very low and has seen significant volatility in operating margins. The current market price of the stock seems fairly valued, and from this price, the stock may not produce desirable returns for the shareholder. Therefore, I assign sell ratings to Commercial Vehicle Group, Inc. stock.