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

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: 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: 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 Still Idling

Unlike truck builder PACCAR (PCAR) and commercial vehicle engine builder Cummins (CMI), Commercial Vehicle Group (CVGI) has yet to benefit the market's willingness to overlook tough current conditions in the trucking industry and transition to the recovery/rebound. But with about one-quarter of the company's sales coming from the construction sector, and construction-exposed companies like Caterpillar (CAT) and Deere (DE) still lagging, perhaps that's not entirely unreasonable.

Commercial Vehicle Group's new CEO is saying all of the right things. The company is going to focus on greater market diversification and greater customer penetration (selling more components to the same customers), continue to look for accretion deals, and aggressively extend operations in areas like China and India. At the same time, management continues to operate a relatively flexible operating structure, and is considering further changes to its manufacturing footprint to reduce costs. That all sounds good, and the shares do seem undervalued, but it's likely to leave the market unimpressed until and unless the company starts beating analyst targets again.

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Commercial Vehicle Still Idling