Takeaway: VVV is one of the best investment opportunities in retail today with Instant Oil Change, but the value will only be unlocked if separated.

Valvoline has one of the best growth businesses in all of retail with Valvoline Instant Oil Change (VIOC).  Coming out of the investor day we have higher confidence that VIOC will dominate the quick service oil change industry over the next 5-10 years. Under Ashland VIOC had limited capital to grow.  As it’s own company, VVV has started opening many new stores and acquiring competitors as well as franchisees. With new targets set at the investor day the company is ramping its store openings which will help fuel even higher unit growth and greater share gain.  This is a business that comped up mid-single digits in the last recession, there may be no better place in retail to invest at this part of the cycle (Quad 4 looming) at this valuation.

The implied multiple being applied to VIOC is flat out wrong since it is attached to the rest of VVV’s business, which has admittedly been weak. Unfortunately the current reporting and the “chemicals” history of VVV makes it harder for investors to see the business for what it really is.  Afterall, the company doesn’t even supply revenue and EBITDA consensus numbers for the Quick Lubes segment.  The company doesn’t seem to understand how this hinders the opportunity to be valued appropriately. We think a spin is the only way to unlock the value of VIOC, and it will likely take an activist to push the company and board down the proper path. Unlike other management teams that stiff-arm activist investors, we think that this one will be far more receptive. 

We’ll outline the businesses and the activist bull case in a black book on June 24th at 10am.

Call Details:
Date/Time: Monday, June 24th at 10am EDT
Toll Free:
Toll:
UK: 0
Confirmation Number: 13690864
Live Video Link: Will be provided prior to call.

The details:

Valvoline (VVV) was spun out of Ashland in Sept 2016.  Since then the company has been covered mainly by chemicals analysts.  However, within VVV is two different businesses, and neither of which should be covered as, or valued like, a chemicals company. 

One business (68% of revenue and 55% of EBITDA) is a consumer engine oil brand with a premium brand positioning, with solid margins, in a low to no growth and highly competitive industry, that sells into US and international retail channels of auto parts stores and mass merchandisers, as well as distributors and installer service centers.  This is the two segments of Core North America and International of selling mainly Valvoline branded engine oil.

The other business is a consumer service/retail store, with high margins and comping high single digits, in a moderately growing industry that is consolidating, with relatively weak competition, and big market share opportunity with a successful franchising model.  This is Valvoline Instant Oil Change (VIOC) the main entity of VVV’s “Quick Lubes” segment. (32% of revenue and 45% of EBITDA)

The company’s stock price has been dragged down by weak performance in Core North America as the DIY channel is seeing an abnormally promotional environment which is hurting volumes and margins.  Meanwhile the VIOC business continues to put up great performance, including accelerating comps in this last quarter to +10.8%.

If we think about these as separate companies…

-One (NA and INTL) should be valued like moderately struggling CPG company.  Probably 9-11x EBITDA.

-The other (VIOC) should be trading like a high return, franchised/asset light, consumer store model with lots of growth runway.  That’s anywhere from 15-25x EBITDA.

Yet the entire company is trading at just 9.4x EBITDA today.  With where we think those 2 businesses will be in EBITDA in a year, and what we think are fair multiples (10x and 17x) we can argue 30-50% upside from current levels.  If Valvoline Instant Oil Change does what we think it can over the long term in terms of market share and profitability, it could easily double EBITDA and potentially command a multiple 2x the market is applying today.  That equates to over 100% upside for VVV equity over a TAIL duration.

VIOC Opportunity

Valvoline has likely the best retail/consumer concept and growth story you’ve never heard of.

Valvoline Instant Oil Change is taking a proven, quality service and marketing process approach to an already good industry of oil changes and basic auto services that often operates under subpar processes and business practices.

The industry is ~$6bn growing low to mid-single digits.  That number is for quick service oil changes stores, which doesn’t include the portion of the market consumed by dealers and general service garages, which is large.

There are ~9000 stores, Jiffy Lube has ~2000, VIOC has ~1300, just over half of the industry is smaller/regional players, and mom and pops.  We think VIOC could get to 2200+ stores (including acquisitions).

VIOC has Mid 20s 4-wall margins, HSD to Low DD comps the last 15Qs with positive comps for the last 13 years, and rapid store growth both organic and acquired. A rarity in any retail/DIFM operation.

The competition is relatively weak in this industry.  The number 1 player is Jiffy Lube, it is 100% franchised (VIOC is 36% company owned) and is owned by Shell, which has much bigger businesses to worry about.  Also in our opinion Jiffy Lube has weaker processes for training and marketing, meaning an inferior and less consistent customer experience and monetization.  Mom and pops are not focused on process improvement and maximizing sales and profits, as many are not even open 7 days a week, sometimes not even 6.

We think there is also secular tailwind as changes in perception of time are driving new customers away from DIY each year towards services like VIOC.  About 20% of people in the US do oil changes themselves today.

Separating the Businesses?

The company so far has been resistant to separating the businesses, but not completely dismissive of the idea.  There are some internal accounting elements that make the reported quick lubes margin inflated.  The owned stores of the segment get to “buy” oil at cost. So that is about 400-500bps of margin by our math that should be EBIT within Core NA (lower multiple on that EBIT).  We are factoring this in on our upside calculation.

The argument the company makes for keeping the businesses together is that FCF generated from Core NA helps fund accelerated store acquisitions at VIOC.  That makes sense, but VIOC is rapidly becoming a large part of EBITDA, and likely eclipses Core NA within a year.  Plus, if cash is truly needed for VIOC to drive its growth trajectory, investors (debt or equity) would likely be happy to put money behind that story.