THE HEDGEYE EDGE
Valvoline (VVV) has one of the best growth businesses in all of retail with Valvoline Instant Oil Change (VIOC). Coming out of the investor day this spring we have higher confidence that VIOC will dominate the quick service oil change industry over the next 5-10 years. Under Ashland ownership, VIOC had limited capital to grow.
As its 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 at this valuation. We think the best way to unlock the full value of VIOC is to spin it out of VVV.
In terms of the model, though we don’t have street segment estimates for Quick Lubes or VIOC (which is one of the core reasons for us making the activist spin call in the first place), we think the biggest variance in our model vs the street is VIOC revenue performance. We see higher store growth than guided, and we expect comps to be toward the higher end of the long term guidance range.
After reviewing the results of the latest quarter and following up with the company, we are more bullish on store growth and near term comps, and we see solid profitability with opportunities from leveraging the planned cost cuts, as well as the potential of a product cost tailwind from base oil downward price revisions given the move in crude oil over the last 12 months. Also, given the improving rate of change for Core NA, we see a higher implied multiple for the Branded/Installer Oil RemainCo in our valuation.
As for hearing about a real activist campaign, nominations for directors must be received no earlier than Oct. 3 and no later than Nov. 2 2019 for consideration for the 2020 annual meeting. So there is a decent chance we could hear something over the next few months. If we don’t hear anything, it doesn’t nullify the activist play, it just obscures the catalyst timeline.
Looking at VIOC we see a high margin business, growing store units in the HSD, comping HSD+, and growing EBITDA in the high teens. Half the industry is still unaffiliated small players, while the share leader Jiffy Lube is a net closer of stores. VIOC will roll up the industry while taking customer share and improving metrics within every box under its banner.
When we look at VIOC as a standalone we see the potential for a 25x to 30x EBITDA multiple. Few retailers can check all the boxes that VIOC does, including Amazon protection, low cyclical risk, and long term unit growth. The fears around the Core NA segment for VVV are overly consensus. We think a spin can create value of $25+.
From there the upside in the stock will be driven by VIOC outperformance and growth over time. Over 1-3 years we see another 30-60% upside from the full realization of the VIOC value as it scales.
ONE-YEAR TRAILING CHART
