Commercial Vehicle Still Early In A Major Business Repositioning

So far, so good for Commercial Vehicle Group’s (CVGI) (or “CVG”) attempt to significantly restructure the business away from its low-return, commoditized truck components legacy and toward new opportunities in higher-value electrification projects, including BEV trucks and warehouse automation. The third quarter saw 65% of the company’s revenue come from non-truck sources, and while that number will likely jump around on the cyclicality of the truck business, early execution on this new strategy has been good.

CVG shares have doubled since my last update, and they could still have plenty of room to run. Initial progress with electrical commercial vehicle projects has been positive, and warehouse automation remains a red-hot market. So much of the modeling here is speculative as the company targets fast-growing, relatively new markets where they don’t have much experience, but as an emerging “picks and shovels” supplier to both electrical commercial vehicles and warehouse automation, there’s definite appeal. Keep in mind, though, that this is a small fish swimming in murky, turbulent waters and these shares do carry well above-average risk.

 

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Commercial Vehicle Still Early In A Major Business Repositioning

Commercial Vehicle Crushed Under Covid-19

The COVID-19 pandemic has made life difficult for almost everyone, and it has made an already-challenging situation at Commercial Vehicles (CVGI) that much worse. While 2020 was never going to be a strong year given the cyclical downturn in the truck industry, the sudden, severe disruption to production has created even greater challenges for a company that wasn’t in particularly strong shape heading into this downturn.

While COVID-19 is likely to intensify the downturn that was already happening in CVGI’s primary markets, these markets will recover in time. I do expect the company to participate in that recovery, but there are other, longer-standing issues to consider here, including a chronic inability for the company to meaningfully expand its business into attractive new opportunities or generate better than low single-digit FCF margins.

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Commercial Vehicle Crushed Under Covid-19

Commercial Vehicle: Better-Placed For The Truck Downturn Than The Share Price Suggests

It has to be frustrating at times to be part of Commercial Vehicle’s (CVGI) management team. While this supplier of seating, wiring, trim, and other components to the global trucking and construction equipment market has actually undergone a pretty meaningful restructuring since the last peak in Class 8 truck builds, it doesn’t show up in the share price (which is basically flat since then). Of course, CVGI hasn’t executed flawlessly over that time either; many of the company’s growth plans have come up short, and I’ve taken issue with the approach to M&A over the years.

With the company on the edge of the cliff with respect to U.S. Class 8 truck builds, this is a tough stock to recommend. I do believe the shares are undervalued on a long-term basis assuming low single-digit revenue growth and mid-single-digit FCF growth, but cyclical stocks tend to trade more on near-term earnings prospects, and CVGI is likely to see a meaningful EBITDA decline in 2020.

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Commercial Vehicle: Better-Placed For The Truck Downturn Than The Share Price Suggests

Commercial Vehicle Looks Undervalued, But Business Likely To Deteriorate From Here

Long-term investing may be best for individual investors, but the reality is that investors have to deal with a market that is much more focused on the short term. That’s relevant to the Commercial Vehicle Group (CVGI) investment thesis, as the market tends to value auto and truck suppliers on the basis of their short-term EBITDA margins and revenues, and both of those numbers are likely to get worse for CVGI as the U.S. heavy-duty truck market corrects off a cyclical peak.

I can see some downside risk toward $6/share if the market really punishes the sector for weaker results in 2020, but I think fair value is closer to $8 to $10. That’s decent upside relative to the downside, and Commercial Vehicle has liquidity that could be invested in growth-oriented M&A, but CVGI’s valuation is not so unusual relative to the wider auto/truck parts sector and this business has been more cyclical than many of its larger peers in the past.

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Commercial Vehicle Looks Undervalued, But Business Likely To Deteriorate From Here

Commercial Vehicle Enjoying A Profitable Peak, But Needs To Plan For The Future

This is harvest time for Commercial Vehicle (CVGI), as this supplier of seats, wiring harnesses, and other components to the global truck, construction, ag, and mining equipment market is seeing robust demand as companies like Daimler (OTCPK:DMLRY), Volvo (OTCPK:VOLVY), and PACCAR (PCAR) deliver on record Class 8 truck backlogs and healthy medium-duty truck backlogs as well. While Commercial Vehicle is weathering some higher manufacturing costs (wage-driven, primarily), the company is doing a good job of managing costs and maximizing margins.

The “what next” question is very relevant to this stock. I expect a double-digit decrease in sales next year, as plunging Class 8 orders will quickly deplete that backlog, and recent wins outside of trucking and in geographies like China won’t offset it. I’d love to see CVGI put some of its liquidity to work – while management has long talked of wanting to acquire complementary assets, they haven’t done much, and I think acquiring some electrification assets could be money well spent. I do still believe these shares are undervalued, but they’re unfollowed and the shares could languish on a steeper/longer trough in the core truck market.

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Commercial Vehicle Enjoying A Profitable Peak, But Needs To Plan For The Future

Commercial Vehicle Performing Well In A Plateauing Market

Taken in isolation, things are going well for Commercial Vehicle (CVGI), as the company’s management has executed pretty successfully on cost-optimization and business restructuring efforts. The company also has some future growth opportunities that could drive long-term revenue growth above build rates, as truck and off-road vehicle manufactures add more electrical components and systems to their vehicles. The “but” is that Commercial Vehicle’s primary markets appear to be plateauing and it may be hard for the shares to get ahead as near-term revenue growth prospects diminish.

Holding cyclical stocks through cyclical declines can be a painful test of patience. I do believe Commercial Vehicle remains undervalued, but it’s tough to say how much of the impending decline in truck production is already priced into the shares. Investors with a longer term orientation may not care, but the next year or so could be more challenging for the stock.

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Commercial Vehicle Performing Well In A Plateauing Market

Commercial Vehicle Not Getting Much Love At The Peak Of The Cycle

It’s not exactly news that the market has turned its back on the auto/commercial vehicle parts sector. Allison (ALSN) is a rather glorious exception, with the shares up about 13% over the past year, and Cummins (CMI) has done better than many (down about 13%), but Commercial Vehicle Group’s (CVGI) roughly 30% decline over the past year has been pretty close to the norm for the sector, as investors worry about the near-term impact of higher input costs and the looming cliff in large truck orders and production rates.

Although I do believe that the market is discounting the future cyclicality of CVGI’s revenue and profits too harshly, it’s tough to argue with the tape and the lack of institutional coverage for this name certainly doesn’t help. I do believe the shares are significantly undervalued, but investor sentiment will likely need to improve first for autos and CVGI still needs to prove that it can maintain margin leverage in trucks and execute on long-standing plans to diversify and grow the business.

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Commercial Vehicle Not Getting Much Love At The Peak Of The Cycle

Commercial Vehicle Leveraging The Peak Of The Cycle

Commercial Vehicle Group (CVGI) at long last has its ducks in a row, and the company is enjoying the fruits of a very healthy heavy truck cycle and a pretty strong cycle for construction and agricultural equipment as well. With labor and restructuring issues in its past, management is achieving strong incremental margins and making the most of a very strong production and order cycle for heavy trucks, medium-duty trucks, and heavy equipment.

These good times won’t last, they never do, but this unfollowed seating and components company could still have a few surprises left. There could still be some upside before the truck cycle ultimately turns, but late-cycle plays can be tricky and I’d also note that the lack of coverage tends to lead to more volatile performance here.

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Commercial Vehicle Leveraging The Peak Of The Cycle

Commercial Vehicle Group Finally Seeing Margin Leverage As The Peak Approaches

It has taken longer than expected, but Commercial Vehicle Group (CVGI) is at last seeing meaningful margin leverage and solid incremental margins in response to significant volume growth in the commercial truck and off-road vehicle segments. Now, the question is how well the company can do before North American commercial truck orders peak and decline, and how much growth in businesses outside of heavy-duty trucks can compensate.

CVGI’s valuation is tricky, as is often the case for cyclical companies and especially when key cycles are at or near peaks. On one hand, even on what would seem to be a modest forward EBITDA multiple, the shares appear cheap, and likewise with DCF, but it is very much an open question as to whether CVGI can hold these improved margins as volume in its core business declines and as investors shy away from the sector.

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Commercial Vehicle Group Finally Seeing Margin Leverage As The Peak Approaches

Commercial Vehicle Skids On Surprisingly Weak Margins

The North American commercial truck market continues to improve and Commercial Vehicle Group (CVGI) had been having a great 2017 compared to other commercial truck suppliers like Cummins (CMI) and Allison (ALSN). Unfortunately, the company's efforts to restructure its operations (and reduce costs) and the recovery in off-road vehicle markets like construction have combined in an unexpectedly bad way, leading to meaningfully lower margins, a disappointing second quarter report, and a sharp drop in the stock.

The company's issues with its non-truck wire harness business aren't going to go away, and the company's 2017 margins are going to suffer for it. The bad news is that the company is going to miss out on some of the benefits of this recovery, and they're not going to get that money back. The better news is that the truck market is doing better than expected, the company is doing well in construction on a revenue basis, and the company has made good progress with operating cost reductions.

Commercial Vehicle's margin trouble does reduce the short-term fair value and likely will have the stock in the penalty box for a little while, but the decline does make the valuation more interesting again for investors with a longer-term orientation.

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Commercial Vehicle Skids On Surprisingly Weak Margins

Recovering Markets And Self-Help Pushing Commercial Vehicle Higher

As a shareholder, I can't complain too much about the performance of Commercial Vehicle (NASDAQ:CVGI) since my last update. With the shares up another 50% or so since late December, Commercial Vehicle has not only outpaced truck manufacturers like PACCAR (NASDAQ:PCAR) and Navistar (NYSE:NAV) but also other truck component stocks like Cummins (NYSE:CMI), Dana (NYSE:DAN), and Meritor (NYSE:MTOR). To be fair, though, longer-term performance track records still do not favor Commercial Vehicle, as the company has lagged many comparable commercial vehicle suppliers due to issues with both growth (in terms of underlying markets, market share, and volume) and margins.

Class 8 orders are growing at double-digit rates again, and many companies in the construction and ag space have pointed to signs of recovery in their respective markets. That all bodes well for Commercial Vehicle, as do ongoing efforts to diversify its customer base, gain share, and penetrate growth markets like India. It is my opinion, though, that a lot of this is reflected in the share price now. I can see some scenarios where a double-digit fair value could come to pass, but I consider that a bull-case outlook at this point. Although I do think the shares are still slightly undervalued, I would view them more as a "strong hold" as opposed to a clear buying opportunity.

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Recovering Markets And Self-Help Pushing Commercial Vehicle Higher

Commercial Vehicle Paddling Through The Rapids

Commercial Vehicle Group (NASDAQ:CVGI) continues to see fierce headwinds across its business from the weak end-market demand for North American heavy trucks, construction and ag equipment, but management's efforts to improve the cost structure and cash flow are paying off. The market has noticed, with the shares more than doubling since my last update and trouncing the performance of other commercial vehicle suppliers like Cummins (NYSE:CMI), Allison (NYSE:ALSN), and Grammer (OTC:GMEGF).

Looking ahead, I'm cautiously optimistic that there is more upside potential. Management has meaningfully improved the cost structure and margins of the Construction/Ag business despite ongoing revenue contraction and the Truck business should start to improve later in 2017 as the commercial truck market stabilizes. If Commercial Vehicle can grow revenue at an annualized rate of around 2.5% from the trough of 2017 and generate FCF margins in the 3% to 4% in the better years ahead, a fair value above $7 is still plausible.

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Commercial Vehicle Paddling Through The Rapids

Seeking Alpha: Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

In some respects, Commercial Vehicle Group (NASDAQ:CVGI) is seeing results from its protracted turnaround attempts - the company's gross margins have improved, there is a credible plan in place to reduce operating costs further, and management seems to be well aware of the need to carefully manage its manufacturing footprint to preserve margins. On the other hand, 2016 is likely to be a horrible year for Class 8 truck orders (and particularly the linehaul trucks that offer the most content and best margins), and the company's long-standing efforts to diversify into off-highway markets still haven't borne much fruit.

Although I think Commercial Vehicle's shares remain undervalued on the basis of the cash flows that the company can generate, I don't know how anyone could have a lot of confidence regarding the likelihood that it will generate those cash flows - and a significant industry down-cycle is not often the time to take big swings on risky ideas. So while I do suggest that investors looking for risky deep-value turnarounds could/should dig into this story, and I will continue to hold on to my tiny position, this is most definitely an example of trying to generate alpha the hard way (something that, in keeping with my sloth-like torpor, I generally avoid).

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Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

Seeking Alpha: Commercial Vehicle Changing Gears At An Inopportune Time

As a turnaround story, Commercial Vehicle Group (NASDAQ:CVGI) has been a lousy call. The company has not had all that much success growing share within the seating market for commercial trucks, and management has tried to build up it agriculture and construction businesses during major downturns in those two markets. While the company has made what I consider to be underrated progress in improving its margins, balance sheet, and free cash flow, the fact remains that the shares are down almost 50% over the past year and about 60% over the past three years - significantly underperforming other commercial vehicle parts/components manufacturers like Cummins (NYSE:CMI), Allison (NYSE:ALSN), and Grammer AG.

Now things are about to get even more challenging. The North American commercial truck market is likely at or near its near-term peak, and that doesn't bode well for volumes, or margins, in the company's largest and most profitable business. The ag and construction markets are still soft and not really in a position to contribute offsetting growth. Last and by no means least, the company recently announced the departure of its CEO after less than three years in the job.

While the shares arguably do still trade below fair value, it's hard to argue that investors need to risk their hard-earned money on this turnaround story. The company could well be looking at two or three years of revenue contraction and margin deleverage, and that is often enough to scare off most investors. Patience could still pay here, but the ride is likely to get a lot bumpier before smoothing out.

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Commercial Vehicle Changing Gears At An Inopportune Time

Seeking Alpha: Commercial Vehicle Still A Great Story That Nobody Cares About

The line between patient and stubborn can be a little fuzzy at times, but sometimes investors have to have the stamina to wait for the market to wake up to a story. That is still my approach to Commercial Vehicle Group (NASDAQ:CVGI), as management continues to execute on a plan to drive not only sales growth, but greater diversification and higher margins in the years to come.

Commercial Vehicle Group has badly lagged other commercial vehicle suppliers like Cummins (NYSE:CMI), Allison (NYSE:ALSN), WABCO (NYSE:WBC), and Grammer (OTC:GMEGF) over the past year despite double-digit revenue growth and noticeable improvements in margins. Some of that could be tied to the company's leverage to the possibly peaking North American truck market, but perhaps also because this barely-followed stock is just not on anybody's must-watch list.

Whatever the case may be, I continue to believe this is an interest relative and absolute value story today. I don't think my forecast of 5% long-term annualized revenue growth is that ambitious, particularly given the company's efforts to target growth in agriculture and construction, nor do I believe my mid-single digit FCF margin is ambitious relative to the norms in this sector. Those inputs still support a nearly $9 fair value, though, so I believe this is still a stock well worth consideration.

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Commercial Vehicle Still A Great Story That Nobody Cares About

Seeking Alpha: Despite A Share Price Slide, Commercial Vehicle's Plan Remains On Track

Institutional investors can be a notoriously fickle and impatient lot and Commercial Vehicle (NASDAQ:CVGI) shares have certainly fallen out of favor since the summer of 2014. Commercial Vehicle wasn't the only commercial vehicle-exposed company to see its stock slide, Cummins (NYSE:CMI) and Allison (NYSE:ALSN) also saw declines (albeit not as steep), but it looks as though the Street was unimpressed with Commercial Vehicle's mid-September Analyst Day and is less bullish on the long-term self-improvement prospects.

Admittedly, management's guidance that 2015 and 2016 will be years of investment instead of significant margin improvement was a little sobering. Likewise, I can understand if investors are worried that management is banking on agriculture equipment, a sector that many now expect to be in a multiyear bear market, as a major source of future growth. All things considered, though, not a lot has changed in my long-term fundamental outlook for the company and I continue to believe that $10 is a credible medium-range destination for the shares.

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Despite A Share Price Slide, Commercial Vehicle's Plan Remains On Track

Seeking Alpha: Commercial Vehicle Starting To Show Operating Leverage

This year has seen pretty solid improvement in the North American heavy truck market, with full-year order levels steadily improving along the way. That's good news for Commercial Vehicle Group (NASDAQ:CVGI) as although the company is trying to diversify its revenue base, North American Class 8 truck demand is still the key driver. Better still, a new efficiency-minded management philosophy is starting to produce real results and improving margins. In a market that no longer offers many cheap plays on commercial vehicles, Commercial Vehicle still offers enough upside to worth a closer look.

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Commercial Vehicle Starting To Show Operating Leverage

Seeking Alpha: Commercial Vehicle Still Improving, But Not As Cheap

With Commercial Vehicle Group (CVGI) shares up about 25% year-to-date and 18% since my last article, I can't really complain as a shareholder. In that time period, CVGI's performance has easily outdistanced better commercial vehicle components companies like Cummins (CMI), BorgWarner (BWA), Allison (ALSN), and Grammer (OTC:GMEGF). Some of this can be tied to the strong underlying growth in North American Class 8 orders, but I believe some of it is likely due to the recognition that Commercial Vehicle's new management team has a new, better vision for how to operate this company.

The question with a turnaround is when to take your winnings and move on. I have to admit that I'm close to that point with Commercial Vehicle. I do believe that the company has the potential to gain share outside of its core North American truck market and even relatively small changes in operating margin, EBITDA margin, or FCF margin assumptions lead to meaningful changes in estimated fair value. The shares still look poised for low double-digit returns, but investors shouldn't forget that this is not an inherently high-margin business and they shouldn't overstay their welcome reaching for that next dollar.

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Commercial Vehicle Still Improving, But Not As Cheap

Seeking Alpha: Commercial Vehicle Making Progress, But It's Not Pretty

The turnaround story at Commercial Vehicle Group (CVGI) is moving along at a painfully slow pace, but is moving along. New senior management (both the CEO and CFO have been at the company less than a year) has a lot on its plate, ranging from shifting the R&D process to a more customer/application-specific approach to enhancing productivity to positioning the company for growth in large markets like agriculture and Chinese heavy vehicles.

All of this takes time, and not all of the factors necessary for better results are within management's control. While I wouldn't overlook other quality stories leveraged to commercial vehicles, like Cummins (CMI) or Eaton (ETN), I'm still willing to wait and see if new management at CVGI can deliver better results as the truck and construction cycles turn around. I think reasonable fair value (considering the risks and cyclicality) is around $9.50 today, but simply de-risking the story to a point where Commercial Vehicle would be on par with companies like Allison (ALSN), Cummins, and Eaton would add over $2 per share to fair value.

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Commercial Vehicle Making Progress, But It's Not Pretty

Seeking Alpha: Commercial Vehicle Group's Turnaround Is Slow And Wobbly

Investors in turnaround stories need to have patience, but Commercial Vehicle Group (CVGI) is certainly testing the patience of its shareholders. The company's new CEO needs to be given enough time to let his turnaround plan bear fruit (he's been on the job for less than six months), but it's frustrating as heck to see CVGI go nowhere this year while Cummins (CMI), PACCAR (PCAR), and Allison (ALSN) are all up about 20% and Modine (MOD) and Navistar (NAV) are up more than 60%.

CVGI is currently sitting in the middle of some uncomfortable trends. While Class 8 truck orders have improved, build rates still aren't all that strong and the industry-wide shift away from sleeper cabs is not a positive for the company. Likewise, the company's diversification efforts into end-markets like construction and agriculture is running smack into sluggish trends in those markets as well. I still believe that Commercial Vehicle Group remains undervalued relative to its future prospects, but this is not a stock for investors lacking in patience or those who cannot afford to be wrong about a speculative turnaround pick.

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Commercial Vehicle Group's Turnaround Is Slow And Wobbly