Friday, January 3, 2020

See VG, 'Aye!

On the surface, Commercial Vehicle Group (CVGI) looks like a very cheap stock. This supplier of electronic systems and seats for cabs in trucks and other vehicles trades for just $200 million, having seen its stock price halved from 2018, despite ttm operating income of $64 million. An expected slowdown in the trucking industry has potentially provided an opportunity for investors in a respected, well-entrenched, relatively high-margin vehicle supplier.

As a relatively small vehicle parts manufacturer (for example, an auto parts supplier I own called Linamar trades for over $3 billion), there is a risk that this company is too much at the whim of one or two customers. Indeed, sales to Volvo represent almost 20% of 2019 sales, with the next largest customers not too far behind.

In addition, only about one quarter of the company's products are for the aftermarket. Considering how cyclical the market is for construction and trucking equipment, and the fixed cost nature of this manufacturing operation, this can lead to big losses. Looking back through the financials does indeed show huge losses in 2008 and 2009 for this company. Even if the next recession is not as severe as the GFC, it's fair to say it would not be too surprising to see this company experience at least one negative year.

Losses don't automatically disqualify an investment for me, however. If a company is capitalized to be able to weather a storm, then a very low stock price may represent an attractive opportunity to buy assets at a discount to future income streams. But CVGI is not so capitalized. The company's debt (including operating leases and pensions) of around $150 million looks like no big deal right now. But it could be the difference between making it and going under were economic circumstances outside the company's control to change.

For me, that's the deal breaker. So even though I like a lot about the company, I don't want to be holding this through a recession, even though I don't know if/when one will happen. Since it has been a long time since the last one, I fear the company has become complacent about its financial position, and so I don't want to be anywhere near it!

Disclosure: No position

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