Persistent Market Challenges And Divestitures Predicted To Stall Revenue Growth Across Vehicle Segments

Key Takeaways

• Persistent challenges in key segments and recent divestitures could weaken revenue growth and cash flows.
  
• Ongoing inflationary pressures may affect net margins despite pricing strategies, while capital allocation choices might hinder long-term earnings growth.
  
• Despite declining sales, robust segments and strategic financial actions support revenue stability, profitability improvements, and shareholder value enhancement.

Catalysts

Designs, manufactures, and distributes specialty vehicles, and related aftermarket parts and services in North America and internationally.

• The ongoing challenges in the cyclical recreation vehicle and terminal truck businesses are expected to persist into the first half of fiscal 2025, potentially leading to subdued revenue growth in these segments.
  
• The divestitures of Collins Bus and ENC municipal transit bus businesses result in fewer revenue sources, potentially affecting total net sales and cash flows in the near future.
  
• There is an anticipated reduction in order intake due to current massive backlogs, especially in the Fire and Emergency segments, which could impact revenue once these backlogs normalize over the next few years.
  
• Continuous inflationary pressures and increased input costs are expected to challenge the net margins, even though strategic pricing actions have been initiated to offset some of these pressures.
  
• The company's commitment to substantial capital allocation through share repurchases and increased dividends may limit available capital for reinvestment into operational improvements, potentially impacting long-term earnings growth.

REV Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming REV Group's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.8% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $87.1 million (and earnings per share of $4.11) by about January 2028, down from $257.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 6.8x today. This future PE is lower than the current PE for the US Machinery industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 25.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

REV Group Future Earnings Per Share Growth

Risks

• Despite a decline in sales, the Fire & Emergency groups experienced a 23% year-over-year increase in net sales, supported by production ramps, price realization, and favorable macro trends, which could boost revenue and margins.
  
• The Specialty Vehicles segment's strong adjusted EBITDA performance, aided by efficiency gains and a favorable product mix, indicates potential for future profitability improvements, enhancing earnings.
  
• A robust 2.5-year backlog for emergency vehicles provides demand certainty and production planning visibility, which could stabilize revenue and earnings consistency.
  
• Strategic pricing actions and operational efficiency improvements have led to a 7-year high in adjusted EBITDA margins, potentially maintaining or boosting profit margins.
  
• Authorization of a $250 million share repurchase program and a 20% quarterly dividend increase reflects confidence in financial strength and long-term growth prospects, which could positively impact shareholder value and net income.

Valuation

• The analysts have a consensus price target of $34.88 for REV Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $39.0, and the most bearish reporting a price target of just $28.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $87.1 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 6.9%.
• Given the current share price of $33.82, the analyst's price target of $34.88 is 3.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.