Is Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Trading At A 29% Discount?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Commercial Vehicle Group fair value estimate is US$8.68

• Current share price of US$6.20 suggests Commercial Vehicle Group is potentially 29% undervalued

• The US$11.00 analyst price target for CVGI is 27% more than our estimate of fair value

How far off is Commercial Vehicle Group, Inc. (NASDAQ:CVGI) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Commercial Vehicle Group

Is Commercial Vehicle Group Fairly Valued?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$27.2m	US$27.9m	US$24.5m	US$22.5m	US$21.4m	US$20.8m	US$20.6m	US$20.5m	US$20.6m	US$20.9m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -12.37%	Est @ -7.98%	Est @ -4.90%	Est @ -2.74%	Est @ -1.23%	Est @ -0.17%	Est @ 0.56%	Est @ 1.08%
Present Value ($, Millions) Discounted @ 9.2%	US$24.9	US$23.4	US$18.8	US$15.8	US$13.8	US$12.3	US$11.1	US$10.1	US$9.3	US$8.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$148m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$21m× (1 + 2.3%) ÷ (9.2%– 2.3%) = US$308m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$308m÷ ( 1 + 9.2%)¹⁰= US$128m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$276m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$6.2, the company appears a touch undervalued at a 29% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Commercial Vehicle Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.2%, which is based on a levered beta of 1.505. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Commercial Vehicle Group

Strength

• Debt is well covered by earnings and cashflows.

Weakness

• Shareholders have been diluted in the past year.

Opportunity

• Good value based on P/E ratio and estimated fair value.

Threat

• Annual earnings are forecast to decline for the next 2 years.

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Commercial Vehicle Group, there are three relevant factors you should consider:

1. Risks: For example, we've discovered 3 warning signs for Commercial Vehicle Group (1 is a bit concerning!) that you should be aware of before investing here.

2. Future Earnings: How does CVGI's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.