I had previously held a positive outlook on Commercial Vehicle Group, Inc. (NASDAQ:CVGI) due to my belief that the market was undervaluing heavy duty and medium duty truck production, as well as management’s long-term growth guidance for the electrical systems segment. The economic strength and increased orders due to environmental regulations led to higher North American class 8 truck production in 2023 than initially predicted. However, despite the continued strength in truck production, CVG fell short of its financial targets, causing investor confidence to waver.
The stock has since declined by 40% while the Russell 2000 has seen a 5% increase, highlighting poor performance compared to the unexpected economic strength. I am now less bullish on the stock due to the disappointing business performance and lack of trust in the management team. Despite some potential upside from the current price, I am lowering my 12-month price target to $7.33 based on FY2024E FCF/share of $0.81 and a 9x multiple.
In FY2023, revenue and earnings growth in the electrical systems segment were offset by declines in other segments. While revenue in the Vehicle Solutions segment increased, the Aftermarket segment results were disappointing. Management’s FY2024 guidance suggests flat revenue and earnings year over year, driven by a forecasted decline in 2024 class 8 truck production.
The market’s assumptions may indicate that CVG is fairly priced given the cyclical nature of the business and management’s history of overpromising and underperforming. The market anticipates a competitive advantage period of only about two years for CVG, reflecting skepticism in management’s long-term guidance.
I am hesitant to make any bets on CVG’s performance given management’s track record and the complexity of the business with multiple segments. A potential spin-off or divestment of segments could change my view on the stock, but for now, I do not expect significant re-rating or earnings growth in the next 12-24 months. My 12-month price target remains at $7.33 based on current estimates.
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