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VVV - Valvoline Inc.


aglittell
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Valvoline Inc. (VVV) looks interesting.

 

I took my car to one of their Quick Lube locations last year and was impressed with the experience. My quick observations as I sat in my car led me to believe the locations likely have solid unit economics - the process is quick with limited overhead, and their ability to up-sell a customer who has limited knowledge about their car is high.

 

The stock was spun off Ashland in 2016 and has underperformed the S&P by a large margin. The company has three business segments:

 

  1. Core NA (42% of sales) - consists of selling their oil through retail and installer dist. channels; ex-growth business, expect flat volume growth w/ flat EBITDA

  2. Quick Lubes (34% of sales) - the gem of VVV, opening 100 locations per year w/ 6 - 8% SSS growth, low to mid double digit EBITDA growth

  3. Int'l (24% of sales) - replicating Core NA business internationally, growing volumes at 6 - 8% by targeting growing markets (LatAM, India, China) where VVV has little market share base, mid to high single digit EBITDA growth

 

There is a comprehensive VIC write-up from 2018 that provides a more in-depth look into the different business segments. Since the write-up, the Quick Lube business has outperformed, averaging SSS growth of 8.2% for the last five years while opening over 400 locations. By FY2022, mgmt expects to have over 1700 stores w/ this business contributing over 50% of VVV's EBITDA. The Quick Lube locations are clearly the gem of this company - high SSS growth w/ 37% store-level EBITDA margins in FY19, these margins exclude corp level SG&A. The value proposition of getting an oil change at one of their locations is high IMO - there is no BS, no waiting in a dealership lobby w/ a bunch of other poor souls, and it is extremely quick.

 

Mgmt's plan is to rely on the stable nature of the Core NA business (which hasn't actually been that stable, causing the underperformance since the IPO) and roll the capital into opening more Quick Lube locations and expanding the international distribution channels. Their financial goals for this plan are MSD revenue growth with 6 - 8% EBITDA growth, supporting a 2% dividend and share buybacks while funding the expansion of Quick Lubes and Int'l. Based on today's $5.5bn EV, we're paying about 11.5x for mgmt's FY20 EBITDA guidance of $475 - 485mm.

 

Oil volume and the number of oil changes fell off a cliff in April due to consumers driving less but the business has normalized based on June's numbers - oil volumes were positive and Quick Lube SSS growth was 7% on the June comp.

 

I am still in the DD phase of this but here are my thoughts:

- This company has likely been discarded by market participants due to the years of underperformance and it being a spin off; this may be warranted tbh

- Quick Lube, a very attractive business IMO, will continue to be a larger part of the company (it went from 30% to 45% of EBITDA btw FY16-FY19)

- As the Quick Lube exposure grows, VVV is less dependent on the less attractive Core NA business, potentially driving multiple expansion w/ substantial earnings growth

 

Other considerations:

- Lack of insider ownership

- EV threat - what's the terminal value of an oil change business

- Leverage of 4x EBITDA (business still generated CF last qtr and has over $1.2bn in liquidity)

- Mgmt references adj EBITDA everywhere, as did I for the sake of time, but this excludes their pension underfunding w/ the current liability being $380mm

- M&A - mgmt views COVID as an opportunity to increase consolidation of some of the smaller operators of Quick Lube locations, they have noted that attractive RE has been tough to come by due to pricing but pressure in smaller markets may provide opportunities

- Core NA business deterioration - continued unfavorable mix shift w/ margin compression due to oil base vol and subsequent pricing lag on end markets

 

 

For those who are interested, I would refer to the VIC write-up and the most recent IR presentation from a CG conference in Feb 2020. Let me know what you think.

 

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It doesn't look particularly cheap at first glance.  I think this should be a good business for the next ten years, but not sure after that.  Tire and brake shops should pretty much take over most maintenance business if we get an EV revolution.  It seems like a growth story fighting secular trends.

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It doesn't look particularly cheap at first glance.  I think this should be a good business for the next ten years, but not sure after that.  Tire and brake shops should pretty much take over most maintenance business if we get an EV revolution.  It seems like a growth story fighting secular trends.

 

Agree that electric slowly taking new auto sales share should probably the base case here. Another possibility is that electric takes share quickly if government heavily subsidizes it (like what Norway has done).

 

Also, COVID has caused miles driven to fall off a cliff (see attached). Probably an 'elevator down, escalator back up' situation. Less need for motor oil and oil changes when folks aren't driving nearly as much.

 

This could end up being a long term value trap like WU has been.

ltm_miles_driven.PNG.9fb8bf2cb683a740913b8b8e03fb1ed8.PNG

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I've been to a few base oil/lubricant's conference, people are cognizant that EV will lead to less needs for oil changes.  There is certainly a melting ice cube dynamic to this business.  I have learned the hard way that once people think so, you won't get a decent multiple.  VVV is a good business, but it's no cigarettes with unlimited pricing power.  If you were buying this at 6-7x EBITDA, it is a lot more interesting.  At 11.5x, it's too hard. 

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Does VVV have the technology to autonomously change tires so that it is cool enough to handle Tesla's?

 

ICE's will be around for a long time, but this is the type of business that needs to be bought at 10x or less EBIT to really have a shot of decent return. Just a fair warning, EBITDA seems to make this business better than it really is.

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Agree with the comments regarding valuation above. I think the Quick Lubes business will continue to perform well over the next decade, but maybe I am being naive when it comes to the pace of EV adoption. Regardless of timing on EV adoption, a re-rating w/ that terminal threat on the horizon is unlikely. It will be worth revisiting at a lower multiple or in a few years when the Quick Lubes business comprises a larger portion of the company. 

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