REV Group, Inc. Stock Doubles in 12 Months, Will It Double Again?

Key Points

• REV Group struggled in Q2, but results were better than expected, and the stock is up 10%.
• Institutional activity spiked in Q2 and is supporting the rally for this stock.
• Return to growth and capital returns also support the market, but analysts could cap gains if sentiment doesn't change.

REV Group NYSE: REVG has been showing strong performance over the last twelve months as a turnaround and restructuring effort took hold. The results of those efforts are seen in the FQ2 results, which are propelling the market higher. This stock will likely continue to rally because the outlook includes a return to growth, solid cash flow, and capital return that reduces the share count and builds leverage for investors. 

The primary hurdle is the analyst. MarketBeat.com tracks only six analysts, and their sentiment is lukewarm and sketchy. Only one revision has been issued this year, and it is a reiterated Sell with a boosted price target assuming substantial downside. Other recent revisions include an upgrade to Buy and a boosted price target, which is well below the current action. The consensus rating is a Hold, but the target of $17.60 suggests a high-double-digit upside. The market can continue to rally without the analysts, but their sentiment matters and could cap gains if unchanged.

REV Group Exceeds Targets in Q2: Updates Guidance 

REV Group struggled in FQ2 with weakness in recreational vehicles offset by strength in specialty. The company reported $616.9 million in net revenue, a decline of 9.4% compared to last year, which includes the divestiture of non-core assets. Regardless, the revenue outpaced the consensus estimate reported by MarketBeat.com by 250 basis points. Adjusted revenue is down only 2.7% on a 2.9% increase in Specialty Vehicles offset by a 30% decline in RV. The RV market is still sluggish but is expected to return to growth over the next four quarters. 

Margin is another strength resulting from the company’s restructuring and operational improvements. Despite the top-line decline, the company widened its margin and improved cash flow to grow income and earnings. The adjusted earnings are up 1500 basis points YoY and exceeded consensus by $0.13, with margin strength expected to continue. The caveat is that revenue guidance was trimmed due to persistent weakness in the RV segment, which will also impact earnings. The company expects revenue to fall about 6% this year.

REV Group Capital Return is Reliable

REV Group pays a small but reliable $0.05 quarterly dividend that should continue. The payout is reliable at less than 15% of the earnings, and there is an outlook for increasing the distribution over time. Part of the restructuring effort was to improve operational quality and shareholder value, including the return of capital. 

Evidence of the company’s commitment to the return of capital is seen in the divestiture of the Collins unit, which led to a robust special dividend and share repurchases. The repurchases reduced the share count by nearly 10% in Q1 and are a critical element in the earnings performance. Repurchases are not expected to continue at a double-digit pace but should continue to reduce the count as the year progresses. 

Institutional activity is another noteworthy driver of the price action. The institutions bought before Q2 2024, but their activity spiked in Q2, led by Vanguard. Vanguard doubled its position to nearly 10% and is not the only large holder, just the largest. Other large holders include Dimensional Fund Advisors and Segall Bryant & Hamil, which own more than 10 of the stock; total institutional holdings are 93%, and ownership is broad. 

REV Group Fires A Trend Following Signal 

Analysts and weak guidance aside, the market for REVG stock liked the news, has the stock price up by more than 10%, and is setting a new high. The move is a trend-following signal that higher prices are coming and could lead to another 10% to 20% gain before the next significant resistance is reached. The next target for significant resistance is near the all-time high at $33.