REV Group, Inc. (NYSE:REVG) Screens Well But There Might Be A Catch

You may think that with a price-to-sales (or "P/S") ratio of 0.7x REV Group, Inc. (NYSE:REVG) is a stock worth checking out, seeing as almost half of all the Machinery companies in the United States have P/S ratios greater than 1.6x and even P/S higher than 4x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for REV Group

How REV Group Has Been Performing

REV Group hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Want the full picture on analyst estimates for the company? Then our free report on REV Group will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as REV Group's is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 3.6%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to slump, contracting by 1.6% during the coming year according to the four analysts following the company. Meanwhile, the industry is forecast to moderate by 0.2%, which suggests the company won't escape the wider industry forces.

With this in consideration, we find it intriguing but understandable that REV Group's P/S falls short of its industry peers. We think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as the weak outlook is already weighing down the shares heavily.

What We Can Learn From REV Group's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that REV Group currently trades on a lower than expected P/S since its revenue forecast is matching the struggling industry but its P/S is struggling to keep up. Even though the company's revenue outlook is on par, we assume potential risks are what might be placing downward pressure on the P/S ratio. Perhaps there is some hesitation about the company's ability to resist further pain to its business from the broader industry turmoil. At least the low P/S ratio helps mitigate the risk of the share price dropping substantially, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with REV Group (at least 3 which can't be ignored), and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.