Mad Money

Know your IPO! Cramer finds out if fresh-faced Rev Group is ready to be bought

Know your IPO! Cramer finds out if fresh-faced Rev Group is ready to be bought

Specialty vehicle maker Rev Group went public on Friday, and Jim Cramer feared it could have been lost in the shuffle of worries about Washington.

Rev Group makes vehicles such as school buses, ambulances, fire trucks, street sweepers, mobility vans and RVs. What really caught Cramer's attention was that it is run by Tim Sullivan, former CEO of Bucyrus who made the brilliant move to sell the company to Caterpillar in 2010, close to the top of the commodity cycle.

"For now, I say it is too soon to get involved, although with a guy like Tim Sullivan at the helm, I may end up eating my words," the "Mad Money" host said.

Rev Group debuted at $22 a share and then immediately spiked up 13.6 percent, closing at $25 on Friday. It picked up another 2 percent on Monday.

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Besides the CEO, Rev is No. 1 for market share in the ambulance business, No. 2 in fire apparatus, and No. 1 in school buses medium sized commercial buses and light broom sweepers. It also is among the top two for terminal trucks and has decent market share in recreational vehicles.

Approximately 72 percent of Rev Group's sales come from businesses where it is either number one or two by market share.

Each of its end markets are also powered by long-term trends. Rev believes that demographic shifts in the growing elderly population in the U.S. could mean increased demand for buses and ambulances. Additionally, many fire trucks and ambulances will need to be replaced as during the great recession, states and municipalities fell behind historical replacement rates.

Rev now estimates that there is pent up demand in these market, worth about 15,000 vehicles.

What really makes Rev unique is that it is the only specialty vehicle maker that covers all three of these categories.

"That gives them tremendous bargaining power to get lower prices from their suppliers," Cramer said.

And the fact that Sullivan chose to take Rev Group public in the current environment gave Cramer the impression that he is confident that business will ramp up in the future.

However, Cramer had some concerns about Rev. Three months ago the company had just under $260 million in debt. While it has paid off some with IPO proceeds, this is still an ugly balance sheet.

The company also has a private equity sponsor, and these deals have a history of being hit or miss. Cramer was also concerned that Rev is tied to the health of the U.S. economy and fiscal soundness of state and local governments.

The final concern for Cramer is that the stock isn't cheap. While he didn't have the forward estimates for Rev Group, if it continues to grow at the same pace as last year, that means the stock currently trades at approximately 40 times this year's earnings estimates.

"While I adore Tim Sullivan, I think it is too soon to tell with this one and I would stay on the sidelines until we are sure that the business can grow fast enough to accommodate its expensive valuation," Cramer said.

Correction: This article was updated to reflect balance sheet debt of approximately $260 million three months ago.

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