Commercial Vehicle Group’s stock price has taken a beating over the past six months, shedding 21.3% of its value and falling to $1.70 per share. This might have investors contemplating their next move.
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.
Why Do We Think Commercial Vehicle Group Will Underperform?
Even though the stock has become cheaper, we're cautious about Commercial Vehicle Group. Here are three reasons why we avoid CVGI 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 experience short-term success, but top-performing ones enjoy sustained growth for years. Commercial Vehicle Group struggled to consistently generate demand over the last five years as its sales dropped at a 2.8% annual rate. This wasn’t a great result 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. Unfortunately, Commercial Vehicle Group’s ROIC has decreased over the last few years. 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 $33.19 million of cash over the last year, and its $125.6 million of debt exceeds the $20.21 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 decline, the stock trades at 12.4× forward P/E (or $1.70 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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