What a time it’s been for Commercial Vehicle Group. In the past six months alone, the company’s stock price has increased by a massive 88.4%, reaching $1.57 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Commercial Vehicle Group, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Commercial Vehicle Group Will Underperform?
We’re happy investors have made money, but we don't have much confidence in Commercial Vehicle Group. Here are three reasons why CVGI doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Commercial Vehicle Group’s demand was weak and its revenue declined by 1.5% per year. This was below our standards and signals it’s a low quality business.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Commercial Vehicle Group’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Commercial Vehicle Group burned through $22.17 million of cash over the last year, and its $130.4 million of debt exceeds the $45.29 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Commercial Vehicle Group’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Commercial Vehicle Group until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping their customers, but in the case of Commercial Vehicle Group, we’re out. Following the recent surge, the stock trades at 2.4× forward EV-to-EBITDA (or $1.57 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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