The momentum behind REV Group Inc (US:REVG) saw a surge on Thursday after fiscal second-quarter (April) earnings topped expectations. The specialty vehicles maker reported adjusted earnings per share of 35 cents versus a consensus estimate of 19 cents. After management upgraded its full-year guidance, REVG stock closed 9% higher.

The report was just the latest earnings surprise. The chart below from Fintel’s earnings page for REVG shows the history of quarterly performance against market expectations.

Topping Expectations

The company's revenue for the quarter stood at $681.2 million, an 18.2% year-over-year increase and surpassing analysts' expectations of $580.5 million.

Each of its three segments -- Fire & Emergency, Commercial and Recreation -- outperformed expectations, contributing with sales of $283.0 million, $142.0 million and $256.6 million, respectively.

The most positive section of the update was that REV Group raised its outlook for the full year, signalling its confidence in future performance. The company now anticipates net sales to range between $2.45 billion and $2.55 billion, up from the previous guidance of $2.30 billion to $2.50 billion. The adjusted EBITDA guidance and adjusted net income guidance was also lifted. The bottom of the sales and EBITDA guidance range itself topped the most upbeat estimates from analysts in the market.

When we dive into Fintel’s management effectiveness chart and indicators, it is clear that performance has plateaued with metrics beginning to recover once again. The most recent performance from the quarter will be updated into the chart and table in the coming days.

The proprietary measure of OCROIC (operating cash return on invested capital) aims to avoid the possibility of balance sheet and cash flow statement manipulation to show a true underlying measure of performance quarter by quarter. While the OCROIC has fallen back in recent quarters, it remains high at a ratio of 0.13, well above many stock peers in the market

This positive outlook is complemented with further capital management initiatives. REV Group's Board of Directors has authorized the repurchase of up to $175 million worth of outstanding shares, which should drive shareholder returns considering the amount equates to roughly 20% of the estimated $762 million market capitalization.

Despite the positive financial results, it's important to note some challenges faced by REV Group. The Recreation segment experienced significant order cancellations, leading to a decline in backlog. Additionally, the recreational vehicle (RV) market is currently facing cyclical compression, which will have some impact on revenue and EBITDA moving forward.

REV Group's success can be attributed to several factors. The demographic trend of an aging population is driving demand across all segments, while urbanization is increasing the need for buses and emergency vehicles in densely populated areas. 

The company's substantial and growing market share in consumer and municipal end-markets, along with new product introductions and pent-up demand, have contributed to organic growth.

Options Actions

Fintel’s options data paints an easy-to-read picture of what is happening in the underlying options market for REVG.

What we first noticed was the spike in net long options premium bought by traders on June 2 and June 6.

To be sure, REVG options volume is typically thin to nil. However, the traders who had an inkling this result was going to push shares higher, have banked a nice profit from their trades.

It is also worth mentioning that the Fintel put/call ratio of 0.11 tells us that sentiment remains very bullish on REVG stock. This rolling quant metric analyzes call and put option volume in a stock in recent months to determine if bullish call open interest or bearish put open interest are dominating the scales. 

Analyst Concerns

Goldman Sachs analyst Jerry Revich said in response to the earnings that while he is positive on the operational turnaround of the business, he still has concerns around the cyclical outlook for the RV business with cancellations driving negative orders during the quarter.

Goldman raised its 12-month target price to $13.00 from $11.50 following the results but maintained its ‘sell’ call on the stock.

Fintel’s consensus target price of $13.43 tells a more bullish story about the outlook for the stock, including more positive calls form over investment houses. We expect the consensus average target will drift higher in the coming weeks following Thursday's update.