WNC - Commercial Vehicle Group: A Niche Vehicle-Oriented Firm Worth Considering

Summary

• Commercial Vehicle Group has a history of mixed but generally positive financial results.
• Recently, bottom line results have come under pressure, but this is normal for the company.
• Shares look cheap enough on an absolute basis to likely have some upside potential associated with it.

Every so often, you will find a company that teeters on the edge between being a ‘buy’ candidate and being a ‘hold’ candidate. One such firm that I recently discovered is Commercial Vehicle Group ( CVGI ). Operationally speaking, the firm is an interesting prospect for investors to consider. A small player with a market capitalization of only $274 million, Commercial Vehicle Group provides various pieces of equipment to the global commercial vehicle market, as well as to other similar industries. It has a global footprint, yet it generates the vast majority of its revenue, about 76.1%, from North America. However, fundamental performance achieved by the firm has been quite rocky over the past few years. Even ignoring the COVID-19 pandemic, profits and cash flows have been rather lumpy from year to year. Fortunately, though, shares of the company do look quite cheap on an absolute basis, even though they look more or less fairly valued compared to similar firms. All of this combined makes it a difficult company to place. But after careful consideration, I do think that it makes for a soft ‘buy’ candidate at this time.

An interesting place to park your money

As I mentioned already, Commercial Vehicle Group focuses on the vehicle market. But we need to get a little more information than that if we are to fully understand the company. According to management, the firm is a global provider of systems, assemblies, and components. All of these items are sold to customers in the global commercial vehicle market, as well as to customers in the electric vehicle market and the warehouse automation markets. From a manufacturing perspective, the company has its hands in 10 different countries across the globe, ranging from the Czech Republic to China to the US. This large footprint gives it the ability to sell to customers throughout North America, Europe, and the Asia Pacific region. But as I mentioned already, the vast majority of its revenue does come from here at home.

Operationally speaking, Commercial Vehicle Group does have four different segments that it operates. The first of these is the Vehicle Solutions segment. Through this, the company produces and sells commercial vehicle seats, including those for heavy-duty trucks, medium-duty trucks, last-mile delivery trucks and vans, construction and agricultural equipment, and more. It also produces plastic components such as trim for the commercial vehicle market and recreational vehicle markets, as well as cab structures for the North American truck market. This particular segment is the largest, accounting for 51% of the company's revenue during its 2021 fiscal year.

The next segment to pay attention to is the Warehouse Automation segment. This unit, according to management, produces and sells warehouse automation subsystems such as control panels, electromechanical assemblies, cable assemblies, and power and communication solutions. Primary customers for this segment include those in the e-commerce, warehouse integration, transportation, and other markets. This segment accounted for roughly 19% of the company's revenue during its 2021 fiscal year. Next, we have the Electrical Systems segment. This unit, management said, produces and sells cable and harness assemblies for various voltage applications, control boxes, dashboard assemblies, and more. It's responsible for 17% of the company's sales. And finally, we have the Aftermarket & Accessories segment, which produces seats and components sold in the commercial vehicle markets, commercial vehicle accessories like wipers, mirrors, sensors, and more. It also produces office seats that are largely sold throughout Europe and the Asia Pacific region. This is the smallest of the segments, accounting for only 12% of the firm's revenue during its 2021 fiscal year.

Over the past five years, Commercial Vehicle Group has been on an interesting journey. Between 2017 and 2019, sales rose year after year, climbing from $755.2 million to $901.2 million. Then, in 2020, sales fell to $717.7 million because of the COVID-19 pandemic. Fortunately, this drop was short-lived, as evidenced by the fact that, in 2021, sales spiked to $971.6 million. From 2020 to 2021, the sales increase for the company came from multiple sources. For instance, it benefited from a $143.6 million sales increase associated with products sold to OEMs. It experienced a $99.1 million increase in revenue, totaling 151.9%, associated with warehouse automation sales. The firm saw a 6.4% increase, totaling $6.4 million, from the aftermarket and OES sales. And it saw a $4.8 million rise in revenue, amounting to a 112% year-over-year increase, associated with other revenue-generating activities. It is worth mentioning that the company benefited to the tune of $13.2 million from foreign currency fluctuations.

On the bottom line, the picture for the company has been quite volatile. Over the past five years, net profits ranged from a low point of negative $37 million to a high point of $41.5 million. No clear trend here could be established. Operating cash flow has been volatile, but has at least demonstrated a consistent trend over the past few years. After peaking at $41 million in 2018, it began declining year after year, eventually hitting negative $29.8 million in 2021. If we adjust for changes in working capital, it actually becomes more volatile. This can be seen in the first chart in this article. That same kind of volatility can also be seen when looking at EBITDA.

When it comes to the 2022 fiscal year, we have data right now covering the first nine months . Sales increased modestly during this time, climbing from $742.7 million to $746.6 million. And just as has been the case for the past few years, bottom line results have been all over the map. Net income, for instance, dropped from $21.1 million in 2021 to $10 million in the first nine months of 2022. Operating cash flow, on the other hand, went from negative $20.9 million to positive $33.8 million. On an adjusted basis, however, it shrank from $52.4 million to $32.3 million, while EBITDA fell from $59.7 million to $40.2 million.

We don't really know what to expect for the 2022 fiscal year. The only thing that management said in regard to guidance is that debt reduction for the year will be near the high end of the $25 million to $40 million range the company previously forecasted. As for bottom line results, I decided to annualize the data we saw in the first nine months of 2022. This would result in net income of $11.2 million, adjusted operating cash flow of $37.1 million, and EBITDA of $48.8 million. Based on these figures, the company is trading at a price-to-earnings multiple of 24.5, at a forward price to adjusted operating cash flow multiple of 7.4, and at an EV to EBITDA multiple of 8.6. Using, instead, the data from the 2021 fiscal year would give us multiples of 11.6, 4.6, and 5.8, respectively. As part of my analysis, I decided to compare the company to five similar businesses. On a price-to-earnings basis, the four companies with positive results ranged from a low of 6.9 to a high of 29.9. Using the EV to EBITDA approach, the range for the five companies with positive results was between 7.9 and 39.8. In both of these cases, three of the companies were cheaper than Commercial Vehicle Group. Using the price to operating cash flow approach, meanwhile, we end up with a range of between 11.3 and 83.1. In this case, our prospect was the cheapest of the group.

Takeaway

I always like to find niche businesses to consider investing in. The thought of finding a firm that does one or only a few things and does so very well has always been appealing to me. In terms of emphasis, Commercial Vehicle Group definitely hits that mark. However, the fundamental performance of the business, particularly on the bottom line, has been very volatile from year to year. This makes the company less attractive than it otherwise might be. Shares are also more or less fairly valued compared to similar firms. But they are cheap enough on an absolute basis, in my opinion, to warrant a soft ‘buy’ rating at this time.

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