What if there was an automotive stock out there, one you almost certainly haven't heard of, that pays a dividend and has outperformed Tesla and Ferrari, and tripled the S&P 500 over the past three years? At the very least, REV Group (REVG -2.35%) is an intriguing stock to learn about and to keep on your watch list. Here's why.
REV Group 101
Since you're not likely to have heard of the company, let's start with the basics. REV Group is a leading designer and manufacturer of specialty vehicles and related aftermarket parts and services. It operates in three primary segments: fire & emergency, commercial, and recreation.
REV Group (REVG) TTM sales through Q3; TTM = trailing 12 months. Image source: REV Group.
When you think about public service departments that buy ambulances, fire trucks, school buses, transit buses, industrial sweepers, and even recreational vehicles, they often go to REV Group for their needs.
Let's dive into the strength of its current business, a vibrant backlog of orders, and one catalyst that could drive the stock even higher.
A ballooning backlog
There are few things that reassure investors as much as a vibrant backlog of orders. That kind of revenue transparency is welcomed, and REV Group's backlog doesn't disappoint at a staggering $4.5 billion.
Let's add some context to that figure. That's nearly two years' worth of net sales -- the company's full-year 2024 net sales guidance is between $2.6 billion and $2.7 billion.
Now let's look more closely at the segment driving that backlog of orders.
Fire & emergency
REV Group's primary category right now is fire & emergency, and with a 2023 year-end record backlog of $3.6 billion, it's not only powering results, but it's also poised to drive future profits.
What's even better for investors: improved profitability. Net sales jumped from $253 million during 2022's fourth quarter to $339.1 million a year later. What really leaps out at you is the segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which jumped from $1.9 million to $26.8 million over the same time period.
The boost in profitability came from efficiency gains from labor retention, increased starts and completions (essentially, improving operations and throughput), and an ability to push through price increases.
Investors would be wise to understand that REV Group's fire & emergency segment is subject to seasonality effects, and management expects a typical slowdown during the first quarter of 2024 due to fewer working days.
The recreation catalyst
REV Group's commercial segment has remained stable, yet growing, and has also seen strong backlog for school buses, but soft demand for terminal trucks and street sweepers. The adjusted EBITDA margin jumped for the category from 3% in the fourth quarter of 2022 to nearly 12% a year later.
But the real catalyst was in the recreation category, which has been hit with soft demand for towables and camper units. The company's 2023 year-end backlog decreased 66%, and its price increases were partly offset by discounting in slow-growth categories.
Management is focused on cost savings and labor retention to offset the demand weakness, but a boost in recreational demand heading into spring and summer could really help drive the bottom lines of the segment and the company.
Is the stock a buy?
It's a tall task to ask REV Group to triple the market again over the next three years, but one thing investors can be sure of is that the company not only sells finely tuned machines, it's also becoming a finely tuned machine itself, as evidenced by its surging margins in two of its three segments.
The backlog gives revenue transparency that is rarely found in the stock market. The company trades at a fair price-to-earnings ratio of 22 times, and the cherry on top for some income investors might be its 1.2% dividend yield that could easily grow if the company's margins continue to improve and recreation-vehicle sales rebound.
If the company doesn't appear to be a buy for investors now, keep REV Group on your watch list in case an opportunity comes to scoop up shares on a dip.
