Marvelous Microcaps
Commercial Vehicle Group, Inc. (CVGI)
INTRO:
At Perritt Capital Management, we take focused positions in companies where we have a high conviction in their success; companies that are out of the mainstream of small cap investing. To highlight our process, we are pleased to present the newest installment in our ongoing series “Marvelous Microcaps – Big Ideas on Small Companies.” This series profiles companies that we believe have a niche in their existing markets or are launching a product that could disrupt their marketplace.
THE COMPANY:
Commercial Vehicle Group, Inc. (CVGI), designs, manufactures, and markets component and assemblies in the vehicle and light industrial markets. They have historically been focused on seating and electrical assemblies with a focus on the class-8 (semi-trucks) and heavy equipment markets. Recently, the company has broadened their go-to-market strategy by concentrating new sales efforts on less penetrated segments of the market, including the electric vehicle and medium duty delivery vehicle markets. They have also carried some of their skillset over to warehousing in the form of their industrial automation segment. Today, CVGI reports revenues in four segments; global seating, electrical systems, industrial automation, and aftermarket and accessories.
CVGI is headquartered in New Albany, OH and has a global presence, with operations in the U.S.A, Mexico, the UK, The Czech Republic, Ukraine, Thailand, India, China, and Australia. This footprint allows them to serve customers in any market. Within their auto-related segments, they generally sell to Original Equipment Manufacturers (OEMS) though they do have some aftermarkets parts business. Customers in the warehouse automation space tend to be those with expanding distribution needs, in support of the growth in home delivery.
WHY WE OWN: THE PERRITT ADVANTAGE
Commercial Vehicle Group has been a well-known name with Perritt for a number of years, and we have bought and sold the stock several times in the past. While we have always found their core business to be a solid one, it has historically been volatile due to extreme customer concentration and the mature nature of their end markets. To illustrate, as recently as 2019 their top five customers accounted for 60% of their revenue. This is due to the nature of the class-8 truck market, where a small number of players make up the manufacturing base and thus have pricing power with their suppliers. With these market dynamics, CVGI has historically had thin margins on many of their contracts leaving little margin for error on their end in terms of executing and making it difficult to cover corporate overhead expenses. The company as well as the stock performed well in periods of economic growth and underperformed substantially during periods of slow growth and recessions.
In 2019, the company had a new management team come to the company with a goal of reducing the cyclical nature of their revenue stream by growing their market share in other segments of their end markets where they can command better pricing power. This goal led them to target growth in the medium duty delivery and electric vehicle segments. Both these segments have experienced substantial growth over the past several years. Medium duty delivery vehicles have seen a multi-year growth trend related to the need for more home delivery vehicles while electric vehicle sales nationally are growing high teens percentages. Both segments of the market have a more fragmented manufacturing base as well, which allows CVGI to command better pricing power with their customers.
These efforts have begun to have an impact on the company’s financial profile. Since the new management team came on board in 2019, they have reduced their customer concentration in their top five customers from 60% of revenues to 50%, with concentration from class-8 truck manufacturers falling from 55% of revenues to 45% in that same period. They have seen most of their wins come from the electric vehicle market, where they command better margins. In their most recent quarter, they posted the highest gross profit margin since pre-COVID on the back of strong performance from their electrical systems business. The company is in the midst of a $30 million dollar cost cutting program this year as well, which will reduce corporate overheard and improve their long-term profitability. Their industrial automation segment has been volatile, experiencing an unusually strong period of growth due to home delivery needs during COVID followed by a sharp pullback, but CVGI has remained focused on controlling costs and has managed the segment well.
Recently, the CEO that led the team during the shift in strategy over the past four years left the firm for a new role at a larger enterprise. While a permanent successor has not been chosen, the Chairman of the Board and CFO that were part of the transition remain and continue to guide the firm’s strategy according to their stated goals.
We currently hold CVGI in both funds and hope to remain holders for some time. We consider CVGI to be a cyclical stock exposed to the automotive space and all the associated risks that come with investing in that segment of the market. However, they are taking steps to reduce that volatility and grow revenues in segments of their end markets that are poised for long term growth, and we believe that the risk versus reward equation is compelling enough to hold a position.