REV Group is a speculative buy for 2024

Key Points

• REV Group had a solid Q4 and guided the market higher.
• Strengths in the F&E and commercial segments offset weaknesses in the recreational sector.
• RVIA data suggests recreational sales will return to growth in 2024, and there is a healthy dividend to help bide the time. 

REV Group NYSE: REVG struggled to retain and regain traction over the last two years as supply chain hurdles and industry normalization in the RV market took a toll on production and deliveries. However, the company leaned hard into the supply chain and operating improvements that began to take hold earlier this year and have this transportation company firing on all cylinders now. 

While weakness persists in the RV market, it is normalizing and expected to return to growth over the next year. Until then, strength in the Fire & Emergency and Commercial segments will sustain above-consensus growth. And REV Group pays a healthy little dividend to help mitigate risks. 

REV Group: a double-beat and rosy guidance lift share prices

REV Group had a solid, bordering on robust quarter with revenue of $693.3 million, growing 11.2% YOY and outpacing the consensus by 400 basis points. The strength is due primarily to the Fire & Emergency segment, which grew by 34%, aided by supply chain improvement, manufacturing efficiency, and increased delivery and mix. The Commercial segment was also solid, with a gain of 25% driven by mixed internal results, while the Recreational segment contracted by 17%. 

Margin news is more impressive. The combination of operating improvement, cost control and leverage drove wider margins, improved cash flow and free cash flow. Moving down the statement, operating income grew by 2.5X, net income by 3.4X, GAAP earnings by more than 300% and adjusted earnings by 80%. More importantly, the adjusted earnings topped the consensus by 5500 basis points to outpace the top-line strength significantly, and margin strength is expected to persist next year.

The guidance is good and potentially cautious, given the momentum displayed in Q4 2023. The company expects revenue to be flat to up low-single-digits with a double-digit improvement in margin. The adjusted EBITDA is forecast to grow more than 12% and may benefit from unexpected leverage. Segmentally, the backlog in F&E is up 40% to a record level and compounded by an expectation the Recreation segment will return to growth. The latest data from the RVIA suggests RV wholesale deliveries will increase by 14%, indicating demand for REVG platforms.  

REV Group strengthens a strong balance sheet

REV Group improved more than its physical operations. The surge in revenue and improved cash flow allowed it to strengthen its already strong balance sheet. The company’s cash and assets are up compared to last year, net debt is low at $128.7 million, and the payments have ample coverage. The company’s leverage is incredibly low at 0.3X equity and 0.1X assets, leaving plenty of cash flow for reinvestment and the dividend. 

REV Group is not a high-yield issue, with a payment worth roughly 1.15% of the pre-release price action. However, the payout ratio, about 18%, and the growth outlook are attractive. The company has solid business and cash flow and should be able to increase the dividend over time.

The technical outlook: REVG is at a critical turning point

The price action in REVG began to trend higher mid-year and is now at a critical turning point. The 5% post-release pop has the market trading at a key resistance level and may continue higher. If the market breaks above this level, near $18, it will signal a complete reversal within a more extensive trading range. 

In that scenario, the market could increase to $20 and possibly set a multi-year high. Among the catalysts for such a move are the analysts. The analysts have yet to issue updates for 2024 but have been lifting their price targets and upgrading sentiment all year. As it is, the stock is rated at Hold (up from Reduce) with a target of $15.80 at the consensus.