REV Group Inc (NYSE:REVG) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Criteria

Peter Lynch’s investment approach, detailed in One Up on Wall Street, centers on finding companies with stable growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) method. This method highlights key financial indicators like earnings growth, profitability, and financial stability while steering clear of overpriced or heavily indebted firms. Lynch’s model favors businesses with consistent, moderate growth, high returns on equity, reasonable debt levels, and good liquidity, traits that point to lasting strength over quick gains.

REV Group Inc (NYSE:REVG), a producer of specialty and recreational vehicles, meets many of the important benchmarks in Lynch’s approach.

How REVG Matches the Peter Lynch Standards

1. Earnings Growth in a Manageable Range

   • Lynch preferred firms with steady, not extreme, earnings growth, usually between 15% and 30%. REVG’s 5-year EPS growth of 29.36% fits this range, showing stable progress without signs of unsustainable rapid expansion.
   • The company’s projected forward EPS growth of 37.64% points to rising profitability, a good indicator if performance stays on track.

2. Fair Valuation Using PEG Ratio

   • A key Lynch measure, the PEG ratio (P/E adjusted for growth), should ideally be ≤1 to show fair pricing. REVG’s PEG (past 5 years) of 0.79 implies the stock is priced below its historical growth rate.
   • Though its P/E of 23.14 is a bit higher than the industry average, the PEG ratio accounts for growth, making the stock attractive for GARP-focused investors.

3. Solid Profitability Indicators

   • Lynch valued high Return on Equity (ROE) as a mark of efficient capital use. REVG’s ROE of 27.08% beats 92.97% of its peers in the machinery sector, showing strong profitability.
   • The company also has a good Return on Invested Capital (ROIC) of 15.90%, further proving its ability to create value from investments.

4. Moderate Debt Levels

   • Lynch avoided firms with high debt, preferring Debt/Equity ratios below 0.6 (ideally under 0.25). REVG’s D/E of 0.36 shows a balanced financial structure, lowering risk.
   • The company’s Altman-Z score of 4.43 and low debt-to-FCF ratio (0.82) indicate strong financial health, with enough resources to handle obligations.

5. Sufficient Liquidity

   • The Current Ratio of 1.66 meets Lynch’s minimum requirement of ≥1, meaning REVG can cover short-term debts. However, its Quick Ratio of 0.53 is slightly weak, hinting at reliance on inventory for liquidity.

Key Strengths and Weaknesses

REVG’s fundamental analysis report shows a mixed but mostly positive picture:

• Strengths: High ROE/ROIC, better margins, low debt, and share repurchases (a Lynch favorite).
• Weaknesses: Falling revenue (-9.5% YoY), lower-than-average gross margins, and weaker quick liquidity.

While revenue declines are a worry, the company’s earnings growth and efficiency metrics suggest operational gains might balance out top-line challenges.

Final Thoughts

For investors looking for Lynch-style GARP picks, REVG stands out with its stable earnings growth, fair valuation, and strong profitability. Its sensible debt levels and high ROE match the strategy’s focus on financially secure growth companies.

To find more stocks filtered by Peter Lynch’s criteria, check the full screener results here.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before making investment decisions.