Valvoline: Fleet and non-oil change revenues are growing faster than the core business

Yahoo

20-05-2025

Business ModelQuick lube and light maintenance services, such as tire rotations, battery replacements, oil and transmission fluid changes, and tune-ups, are provided by VVV, a US-based operator and franchisor of auto repair shops. 53% of VVV's 1,790 Valvoline Instant Oil Change, 300 Valvoline Express Care, and more than 100 Great Canadian Oil Change locations are franchised, following the company's March 2023 sale of its Global Products division to Aramco.
Who Owns ValvolineEven though, there are a number of high profile gurus who currently have Valvoline in their portfolio, VVV does not even make more than a percentage of their portfolio. And this is something quite obscure as an observer as Valvoline ticks all the boxes that value investors would want to have in a stock.Perhaps, gurus do not own this stock because Valvoline has not paid a dime in dividends past 3 years, despite such robust cashflow. Valvoline announced to buy back shares worth $400 million but that did not seem to garner the attention of deep-value Gurus like Dan Loeb, Jeff Ubben and Nelson Peltz (Trades, Portfolio). At the moment Chuck Royce (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have stakes in Valvoline which represents 0.46%, 0.04% and 0.03%, respectively, of their portfolio.Growth DriversStrategic Divestment: A major strategic change towards Valvoline's Retail Services segment came when it sold Aramco $2.65 billion in Global Products business. With almost $2.25 billion in net proceeds, the deal Valvoline used to fund retail operations expansion, lower debt, and improve shareholder returns. The sale gave Valvoline a large cash infusion, so improving her liquidity and financial flexibility. Reducing debt improved the balance sheet of the business, so lowering financial risk. A part of the earnings were reinvested into the Retail Services division, so enabling future expansion in a market with great promise. Driven by trends like hybrid and electric vehicles, Focusing on Retail Services helps Valvoline access the expanding automotive preventative maintenance industry. Over time, this change is supposed to raise shareholder value and profitability. Valvoline uses its brand and knowledge in the automotive service sector, thus this is probably going to result in improved margins and revenue growth. This divestment fit Valvoline's approach to refocus on the expanding automotive preventive maintenance industry, especially in view of increasing demand from markets for hybrid and electric cars. Though past divestments like Ashland's 2016 Valvoline IPO of Valvoline shares occurred, the Global Products sale is the most notable recent change. In its core retail business, this action has positioned Valvoline for financial flexibility and accelerated expansion.Secular Tailwinds: Quick lube manufacturer Valvoline has a chance to reach its target of 3,500+ units in the sizable and extremely fragmented addressable market. With a profitability CAGR that is faster than revenue, an EBITDA CAGR of 9.8%, and a net sales CAGR of 8.6%, the company's store-count story is bolstered by appealing unit economics. The management of Valvoline is laser-focused, making significant investments in technology and teams to promote operational excellence. Valvoline is showing revenue increments because they have a very well-defined operational strategy which is centered on the Valvoline Instant Oil Change (VIOC) service centers that are mainly engaged in quick, handy and preventive automotive maintenance. Network expansion is also very important; by building more service centers, Valvoline brews its market gaining and facilitates the company to serve more clients and directly drive revenue. Besides, the operational efficiency also serves to broaden this growth the fast processes and less duration of services allow every location to handle more customers each day which leads to an increase in per-center income. Furthermore, Valvoline prioritizes customer experience: the use of also digital tools such as online scheduling to enhance convenience, which in turn, creates loyalty and generates the repeat business. The way it manages the franchise ensures the quality is consistent in all locations through the training and support it gives, thus, the brand gets trust and it becomes more attractive to customers. Moreover, Valvoline is also ready to the market developments such as offering the services for electric vehicles due to the fact they will be more opportunity makers in the future. This tactical combination involving the expansion, efficiency, customer focus, and adaptability has led to an almost doubling of revenue for Valvoline and has set it firmly at the top of the automotive service field.The organization's mix of scaled-down smaller partners and big, capital-rich partners creates a special franchisee dynamic. Throughout the whole store footprint, VVV has continuously reported +HSD/LDD comp growth, accounting for +710%. Given that the DIY habit is mostly based on income lines, the transition from DIY to DIFM is a significant source of traffic. Since the population of people aged 35 and under is larger than that of their elders, there will be ample space for future traffic growth as these generations approach their prime spending years. Since [url="]fleet [/url]and non-oil change revenues are growing faster than the core business and continue to scale as part of the mix, they offer a chance for higher ticket and volume sales. To take advantage of this, management recently installed a new CRM system.Historically, there has been debate around whether increased oil efficiency from synthetics will reduce quick lube revenues as the relative increase in mileage exceeds the price premium. However, Valvoline's performance has shown that increased premiumization has not affected unit volumes to date, suggesting continued premiumization can drive further revenue growth as vehicles using conventional oil begin to phase out of the car parc.EV Adoption: By 2050, it is anticipated that up to 30% of cars will be electric vehicles (EVs), with a "worst case" scenario that still permits a sizable amount of fuel-efficient vehicle (FCF) generation. There are many different viewpoints in the EV debate, so it's critical to assess the risk of EVs using Toyota's harsher 30% metric. The number of ICE vehicles on the road in 2050 would be 5% fewer than it is now, based on this level and historical car park growth. This suggests a Total Asset Management (TAM) that is significantly larger than the current footprint of quick lube providers. Customers' realization that the cost of fueling or charging a car is not the biggest expense of owning one is causing the EV Euphoria story to slow down. EV batteries' high cost and brief lifespan have had a direct effect on the residual value of these cars, raising owners' insurance and financing expenses. The invisible accrual cost brought on by EVs' comparatively lower residual value makes this situation even worse.Valvoline is not waiting to be the last horse and buggy in town, as it recognizes that even in an EV world, these vehicles will need some form of convenient quick service solution. The company's true asset is its network of conveniently located boxes with bays, basements, and trained automotive technicians, which will likely be the largest and densest in the country in a few years. Management has begun taking steps to address this need and pilot maintenance services geared and advertised directly to the EV market. Valuation :An effective way to value VVV as a whole would be calibrating its price per outlet today against price per outlet right after the completion of its monumental disposal of Global Products Business to Aramco on 1st March 2023.
The chart above depicts the material drop in price/outlet for VVV and also makes an argument of VVV's poor management. However, to add more context to our analysis, when we account the fact that VVV's outstanding shares has gone down by almost 25% whereas the stock was down only 2% over the course of this period.
Key RisksLocal operators and quick lube franchises face fierce competition, and premiumization and price inflation may cause a shift toward longer oil change intervals. Additionally, because customers may choose to have longer oil changes, the move to electric vehicles (EVs) in the car parc mix may have a negative effect on the unit economics of VVV stores.Conclusion:Valvoline's well-defined operational strategy, which focuses on Valvoline Instant Oil Change (VIOC) service centers for convenient, quick, and preventive auto maintenance, is responsible for the company's revenue growth. Because it enables the business to serve more customers and generate income directly, network expansion is essential for market growth.This article first appeared on GuruFocus.