JP Morgan is upgrading Commercial Vehicle Group (NASDAQ:
) to Overweight from Underweight and establishing a $7 price target.
Firm notes that over the past three and a half weeks, CVGI is up 176%. Despite the stock’s recent appreciation, they are upgrading CVGI to Overweight from Underweight into an improving liquidity profile, solid management execution through the current downturn, and signs that the North American Class 8 truck market (~50% of normalized revenue) is at, or close to, trough.
Improving liquidity profile. CVGI recently completed a partial debt exchange and revised its credit facility agreement. In JP Morgan's view, the transactions buy CVGI time for end markets to recover, as the exchange offer should lower CVGI’s cash interest payments through the beginning of 2011, while the revised credit agreement significantly reduces the risk that CVGI will violate its debt covenants over the near term.
Solid execution in a dire market. In firm's view, CVGI’s management team has executed well in the current downturn given the extremely sharp declines in end market demand. Over the past two quarters, CVGI’s revenue “fell off a cliff,” down 45% and 50%, respectively, in Q1’09 and Q2’09. However, they were encouraged by CVGI’s Q2 operating performance, with CVGI’s continuing operating margin improving by 420 bps sequentially. In JP Morgan's view, solid execution limits downside risk until end markets recover as well as potentially allowing CVGI to produce higher margins in the next cycle than in past cycles.
Class 8 market close to trough. Firm estimates that CVGI generates roughly 50% of its normalized revenue from the NA Class 8 truck market. Leading indicators suggest that freight is at, or near, cyclical trough, which should eventually lead to a meaningful recovery in trucker profits and truck orders. They continue to believe that Class 8 builds will trough at 115k (down 44% YoY) in 2009 before improving to 166k (up 45% YoY) in 2010, with builds rising toward normalized replacement demand levels of 240k-250k by 2011 or 2012. Additionally, rising military production could also provide a tailwind for CVGI, particularly from OSK’s recent M-ATV win.
JP Morgan is introducing a year-end 2009 price target of $7, which represents 81% upside from last night’s close. With liquidity risks abating, investors should increasingly focus on CVGI’s normalized earnings power. Applying a 9x multiple on firm's 2013 normalized EPS of $1.00 and discounting back yields a 2009 year-end price target of $7.
Notablecalls: This is one crazy call from JP Morgan, which is partly why I like it. Generally, the inflection point in the commercial vehicle stocks occurs 6-9 months before the peaks and troughs of the end markets. I guess this is the reason why JP Morgan is upgrading CVGI today. They don't mention this in the call but I'm sure that's what behind it. They didn't want to be the ones upgrading the stock too early (credit problems) and are now playing ketchup.
JPM is looking at the next cycle and calling for at least $1 in normalized EPS, which should eventually send the shares way higher than the current $7 target. But let's face it - who cares about what happens in 2013.
The chart looks like it wants higher and I suspect $4.50 may be in the cards today. I can even see this one trading to $4.75, if the mo-mo crowd picks it up intraday.
The only problem is you have to pay up to get fills. Any fills.
