Operational Improvements And Demand For Emergency And Recreational Vehicles Will Benefit Future Performance

Key Takeaways

• Operational improvements and favorable macroeconomic trends are expected to boost earnings and revenue growth for REV Group.
  
• Strong demand visibility and supply chain strategies aim to stabilize revenues and improve margins, with share repurchases potentially enhancing EPS growth.
  
• Tariff risks, RV segment decline, inflation pressures, and strategic exits challenge revenue and margins despite Specialty Vehicles segment performance.

Catalysts

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

• REV Group has unveiled new intermediate financial targets based on operational improvements and enhanced execution, expected to drive significant earnings growth. This is likely to positively impact future earnings.
  
• The company is well-positioned to benefit from favorable macroeconomic trends, such as population growth and increasing demand for emergency and recreational vehicles, which can drive future revenue growth.
  
• Strong backlog within the Specialty Vehicles segment, providing 2 to 2.5 years of demand visibility, offers confidence in achieving financial targets, supporting future revenue stability and potential increases in net margins.
  
• Implementing multi-sourcing strategies for key components and actively managing the supply chain to mitigate tariff impacts, which could improve cost efficiency and enhance net margins.
  
• Continuous execution of share repurchases under the $250 million authorization indicates a proactive approach to capital allocation. This could drive EPS growth by reducing the number of outstanding shares and reflecting management's confidence in the company's long-term strategy and financial strength.

REV Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming REV Group's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 7.8% in 3 years time.
• Analysts expect earnings to reach $221.7 million (and earnings per share of $4.26) by about August 2028, up from $96.9 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 11.5x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the US Machinery industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 6.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

REV Group Future Earnings Per Share Growth

Risks

• The recently enacted tariffs pose a potential risk to the company's supply chain, despite minimal current direct exposure. Prolonged tariff impacts could affect subassembly costs and raw material sourcing, thereby impacting net margins and earnings.
  
• The decline in Recreational Vehicle segment sales and the soft end market demand highlight vulnerability within this segment. Persistent weak demand could negatively affect revenue and overall financial performance.
  
• The company faces inflationary pressures, notably on materials such as steel and aluminum. Continued inflation without adequate price adjustments could compress net margins and reduce earnings.
  
• Although the Specialty Vehicles segment performed well, the lower demand for terminal trucks and industrial sweepers could hinder segment revenue growth and dampen earnings potential.
  
• The exit from the bus manufacturing business could result in lower overall revenue streams. While this was strategic, the reduced revenue base could impact total company revenue and profitability if not offset by other segment performance.

Valuation

• The analysts have a consensus price target of $50.333 for REV Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $221.7 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of $54.07, the analyst price target of $50.33 is 7.4% lower. 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.