Fire-roasted Returns
Online recipes highlight some interesting kitchen choices. Say you find a post for savory chicken chili and biscuits. Scroll to the bottom. You'll also usually find a one-star comment like this:
"I didn't have all the ingredients. I substituted chickpeas for chicken. I used Coke instead of baking soda. I had no fire-roasted chilis, so I roasted some marshmallows. Tasted weird. One star. Do not recommend."
Did that chef really expect that to be edible?
Substitutes are tricky in other arenas too. Sometimes it's because there's only one source for some machine part. Sometimes it comes down to needs. Other times, it comes down to stubborn preferences.
Putting out fires
Firetrucks, it turns out, are one of those things that are pretty hard to switch. Rev Group makes them. It sells about 30% of the market. It also sells about 50% of the market for ambulances. 73% of its business comes from things with sirens, the rest comes from RVs.
Fire engines and ambulances aren't a growth business. Ambulances last from 7-15 years. A firefighter might drive the same truck her entire career—up to 30 years. It's also a low margin business. Rev G eked-out just a 2% margin in 2021.
Low margins? Low growth? What does Rev Group have going for it?
Instead of growing volume, Rev Group spent most of its effort from 2006-2019 growing share. It began as a private equity platform—it bought a bunch of different firetruck and ambulance builders and bolted them together. It went public in 2017 to buy some more. This way, it gained scale.
Siren customers are loyal. Fire departments tend not to switch brands. Chiefs like to have the fleet looking professional—that means having matching trucks. They also have personal preferences for one marque over another. It's also really important for firefighters to know where the hose valve is—a standard fleet with all the same trucks solves that.
Alarm bells
COVID-19 caused a five-alarm supply fire. Margins crashed. Flagging profitability and poor performance on deliveries led to a management and board shake-up earlier this year. Rev Group is emerging from the rubble. The new team set to refocus on operational improvements and shareholder return. The results have only just started to come in.
Revving the engine
Rev Group's new executive crew lined up ingredients for appetizing shareholder returns. It's expanding margins. They hit 9% in the most recent fiscal year. It jettisoned its unprofitable school bus outfit. It's speeding-up deliveries. It's returning cash to shareholders—buying back shares, paying a special dividend in February this year.
Its recent results point to continued business improvement. Its share price, though, still points to low margins and business struggles. This offers investors an opportunity for appetizing returns.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.