REV Group currently trades at $66.76 and has been a dream stock for shareholders. It’s returned 497% since January 2021, blowing past the S&P 500’s 79.5% gain. The company has also beaten the index over the past six months as its stock price is up 36.6% thanks to its solid quarterly results.

Is now the time to buy REV Group, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is REV Group Not Exciting?

Despite the momentum, we're cautious about REV Group. Here are three reasons you should be careful with REVG and a stock we'd rather own.

1. Weak Backlog Growth Points to Soft Demand

Investors interested in Heavy Transportation Equipment companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into REV Group’s future revenue streams.

REV Group’s backlog came in at $4.64 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 3.7%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders.

2. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

REV Group has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 12.5% gross margin over the last five years. That means REV Group paid its suppliers a lot of money ($87.52 for every $100 in revenue) to run its business.

3. Weak Operating Margin Could Cause Trouble

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

REV Group was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.9% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Final Judgment

REV Group isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 18.5× forward P/E (or $66.76 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.

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