Commercial Vehicle Group (CVGI) is a leading supplier of a full range of cab-related products and systems for the global commercial vehicle market. Its primary markets include heavy-duty (Class 8) trucks, construction, military, bus, agriculture, and specialty transportation. The company’s products include seat systems, electronic wire harness assemblies, cab structures, interior trim systems, and mirror and wiper systems, among others.
Commercial has the number one or two position in several of its markets, and is one of the only suppliers in the North American commercial vehicle market that offers cab systems. Its largest customers include PACCAR (PCAR), Volvo, and Daimler (DDAIF) Trucks, which represented 18%, 14%, and 13% of 2011 sales, respectively.
Demand for Commercial’s products is largely dependent on the number of new heavy-truck commercial vehicles manufactured in North America which, in turn, is a function of general economic conditions, consumer spending, and fuel costs. Nearly 75% of 2011 revenues were generated from the United States.
The company has been reporting strong results for a few quarters now. It finished the year with a big jump in year-over-year sales and profits, driven by healthy demand from the global Original Equipment Manufacturer (OEM) truck markets. Strength from Global OEM construction markets also supported the advance. Management has been doing a good job of improving operational efficiency, as well, and this has allowed margins to continue to widen over the past few quarters. That, in turn, has helped support strong profit gains.
We think Commercial Vehicle is poised for another good year. According to a February 2012 report by ACT Research, a leader in market analysis for the commercial vehicle industry, North American Class 8 production levels are expected to increase from 255,000 units in 2011 to 296,000 in 2012, and 320,000 in 2013. This ought to be driven by higher freight volumes, as well as the replacement of aging vehicles, since, as vehicles age, maintenance costs typically increase measurably.
Regarding the construction equipment market, Commercial’s primary focus is on medium and heavy equipment products. Demand for these goods is typically related to the level of larger scale infrastructure development, including highways, mining, airports, and industrial projects. Spending on infrastructure in the United States is facing a bit of political pressure. However, global demand for construction equipment products should continue to strengthen, and this ought to support solid gains from this group.
Although we believe business prospects for Commercial Vehicle are bright, there are some reasons for concern. The stock has a high Beta of 1.75. This makes the equity a fairly risky investment, with a good deal of price volatility compared to the broader markets.
The company also has a significant amount of debt on its balance sheet, equaling about 95% of total capital. If economic conditions take a change for the worse, or competition heats up, this could affect the company’s ability to make interest payments on its debt, which could have serious consequences to shareholders.
All told, we view Commercial Vehicle favorably, despite the noted risks. Demand trends from most markets look encouraging, and this should help drive profit growth. However, risk-averse investors should remain wary of the issue.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.