Valvoline: Attractive long-term growth story but risk/reward is fairly balanced

Valvoline is an attractive long-term unit growth story that provides needs-based services for the predominantly ICE-powered US vehicle population. The company’s focus on convenient, high-quality customer service will drive incremental share gains. The company’s current valuation is fairly balanced from a risk/reward perspective and do not see a clear near-term catalyst to drive a multiple rerating.

Competitive landscape - Valvoline is the second-largest quick lube operator in the US behind Jiffy Lube, with the third-largest operator (Take 5 Oil Change, owned by Driven Brands) being roughly half the size of VVV’s fleet. In our view, the domestic quick lube market remains highly fragmented and ripe for further consolidation. VVV also holds the second-largest franchise fleet in the US, again behind Jiffy Lube, with VVV’s franchised operations being over 3x the size of Take 5 Oil Change, which is also the third-largest franchise competitor.

Long-term growth - VVV currently has over 1,800 locations (47% company-operated, 53% franchised) across the United States and Canada, and longer term, the company sees an opportunity to nearly double the fleet to over 3,500 locations. Future growth opportunities exist by infilling existing markets and expanding into new markets, with franchise growth integral to the company’s long-term growth ambitions, supported by expanding current partnerships as well as attracting new franchise partners.

Franchise economics - With franchise growth being key to VVV’s long-term growth strategy, we consider unit economics and cash-on-cash returns for perspective franchisees as paramount to attracting and retaining a pool of talented franchise operators. Our analysis of publicly available franchise disclosure documents for VVV and certain competitors highlights that VVV’s franchise locations generate an above-peer average sales per store, and with franchise locations offering an attractive ~30% cash-on-cash return at maturation, we view VVV’s franchise unit economics as supportive for longer-term unit growth.

Long-term growth algorithm - VVV has outlined a long-term growth algorithm which includes expectations for a top-line growth CAGR of 14%-16% for the FY23-FY27 period, supported by expected annual same-store sales growth of 6%-9% and unit growth of 7%-10%. Management also expects mid-teens top-line growth to be accompanied by adj. EBITDA margins of 26%-29%, indicating an adj. EBITDA CAGR of 16%-18% for the period. Compared to our broader coverage universe, we view VVV’s growth algorithm favorably, as mid-teens top-line and high-teens adj. EBITDA growth is among the higher end of expected growth trajectories.