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What a brutal six months it’s been for Commercial Vehicle Group. The stock has dropped 68.8% and now trades at $0.95, rattling many shareholders. 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? Get the full breakdown from our expert analysts, it’s free.
Even though the stock has become cheaper, we're swiping left on Commercial Vehicle Group for now. Here are three reasons why you should be careful with CVGI and a stock we'd rather own.
Why Do We Think Commercial Vehicle Group Will Underperform?
Formed from a partnership between two distinct companies, CVG (NASDAQ:CVGI) offers various components used in vehicles and systems used in warehouses.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Commercial Vehicle Group’s demand was weak and its revenue declined by 2.4% per year. This was below our standards and is a sign of poor business quality.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Commercial Vehicle Group’s margin dropped by 9.1 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. Commercial Vehicle Group’s free cash flow margin for the trailing 12 months was negative 5.3%.
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 $42.59 million of cash over the last year, and its $166.3 million of debt exceeds the $26.63 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.
