Valvoline (NYSE:VVV) recently announced robust Q3 results marked by impressive same-store sales growth. Despite facing challenges in franchise unit expansion and narrowing its EBITDA guidance, the company maintains a strong position in the market. The sale of its Global Products business has allowed Valvoline to enhance its balance sheet and concentrate on its retail operations.
In the investment perspective, Valvoline stands as the leading public automotive aftermarket services retailer, known for its quick and convenient oil change services. Notably, it sold its Global Products business for a substantial $2.65 billion, making a strategic move towards becoming a more streamlined automotive services company. This transition is further underscored by the $1.6 billion share repurchase authorization, a step taken to optimize its operations.
The earnings report for Q3 showcased mixed results. Valvoline witnessed a commendable 12.5% growth in same-store sales, driving a 19% YoY growth in systemwide sales. The growth was a blend of transaction and ticket price increases, though franchise unit expansion slowed due to construction delays. While Q4 is expected to see an uptick in franchise openings, it will still fall short of the initial yearly projection. Management attributes this to construction issues and anticipates that higher sales volume in Q4 might be countered by lower waste oil recovery, impacting the EBITDA margin.
Gross margins saw improvement at 36.8%, propelled by pricing adjustments. Efficient management of SG&A costs, coupled with investments in advertising and talent, contributed to favorable results. Adjusted EPS reached $0.43, a remarkable 105% increase, buoyed by robust EBITDA growth and share repurchases.
Valvoline’s financial stability remains strong, with a sizeable liquidity of over $950 million in cash and short-term investments, and manageable total debt of around $1.6 billion. The company plans to repay $613 million in 2030 bonds, a move that will significantly reduce its net debt.
Nevertheless, the revised EBITDA guidance of $375 – $385 million, narrower than the previous range, disappointed investors, resulting in a drop in share value. The announcement of CEO succession also added to the mix, with current CEO Sam Mitchell retiring and Lori Flees, the President of Retail Services, stepping in.
From a valuation perspective, Valvoline currently trades at a higher multiple than its peers, largely attributed to its impressive growth and margins. However, as the impact of pricing adjustments diminishes and top-line growth stabilizes, the valuation is expected to normalize. Although Valvoline is a solid defensive stock in an uncertain market, its current valuation limits the potential for further multiple expansion. Therefore, our recommendation is to Initiate at Neutral.
Notably, Seeking Alpha’s valuation grade for VVV is a ‘D’, indicating concerns over its elevated valuation. It’s essential to consider the potential risks to this assessment. Shifts in consumer spending habits or fluctuations in base oil costs could significantly affect Valvoline’s business. Furthermore, a substantial transition to electric vehicles might challenge its reliance on motor oil.
In conclusion, Valvoline continues to demonstrate growth potential and maintains a strong financial foundation. While the company’s focus on the retail business is commendable, the current valuation appears to be at its peak. In light of this, we recommend a Neutral stance, acknowledging the company’s strengths and the existing limitations in valuation growth.
