5. Valvoline Inc. (NYSE:VVV)
Number of Hedge Fund Holders: 35
Valvoline Inc. (NYSE:VVV) specializes in automotive preventive maintenance services. The company is known for its 15-minute oil change service, allowing customers to stay in their cars while the oil is changed. They also provide a range of other services, including battery replacements, wiper blade replacements, air filter replacements, and more. They operate over 2,000 service centers across the United States and Canada, including franchises like Valvoline Instant Oil Change and Great Canadian Oil Change.
The company exercises its competitive edge coming from its strong brand recognition, operational excellence, and proprietary technology. During the fiscal fourth quarter of 2024, it reported system-wide store sales of $3.1 billion, marking a 12% increase from the previous year. Valvoline Inc. (NYSE:VVV) achieved its 18th consecutive year of same-store sales growth, with a 6.7% increase from the previous year. An increase in same-store revenue also resulted in Adjusted EBITDA increasing 17% during the same time with an improved EBITDA margin of 27.3%.
The company has plans to accelerate its network growth, it aims to open 250 new stores per year by 2027. In fiscal 2024, it opened 158 new stores, including significant franchising efforts. Moreover, the company has also been gaining new customers, management noted that approximately 20% of its customers are new, primarily attracted by the convenience and speed of services offered. It is one of the best car repair stocks to invest in.
FMI made the following comment about Valvoline Inc. (NYSE:VVV) in its Q3 2023 investor letter:
“After a long history of underinvestment under Ashland and a messy seven years as a standalone public company, Valvoline Inc. (NYSE:VVV) is finally a pure-play quick lube retailer, having sold their motor oil business earlier this year. We like the business model for its stability, growth potential, pricing power, and high returns on capital. The business offers customers a better oil change experience relative to the alternatives. Going forward, the story will be simpler to understand, the analyst coverage will be uniform, and it should get reclassified as retail. In the current environment, Valvoline has the added benefit of having a tight store-level culture that helps minimize labor turnover, and has effectively no shrink, which is currently a major thorn in the side of retailers. Given Valvoline’s choppy history (thanks to the divested motor oil business), we believe investors are in a wait and see mode as the company proves out its standalone financial results and accelerates its organic store expansion. Increased penetration in a fragmented market, expanded usage of synthetic oils, and a consistent experience as consumers continue to shift to do-it-for-me, should drive strong earnings per share growth at high incremental returns. Although we believe we can get an attractive return from just the growth, there is the chance for a higher valuation as Valvoline puts up its first year of (nearly) clean financials in Fiscal Year 2024. We also believe the short- to medium-term threat of electric vehicles is manageable. If our growth expectations are achieved, the downside is modest even if the multiple compresses meaningfully over our five-year investment horizon. We expect investors will increasingly appreciate Valvoline’s simple, high return model after a long period of being obfuscated by inferior businesses.”
