We recently compiled a list of the 7 Best Auto and Truck Dealership Stocks to Buy. In this article, we are going to take a look at Valvoline Inc. (NYSE:VVV) stands against the other auto and truck dealership stocks.
US Car and Truck Dealership Market
The auto dealership market is one of the key segments of the greater automotive industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is forecasted to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.
The auto dealership market is a consumer-centric industry, which revolves around customer confidence, inflation rates, interest rates, and the overall regulatory environment. According to a press release by Reuters on July 26, the US car market is facing headwinds due to weak prices, high inventories, and difficulties in logging profits.
The slowed market environment has hit shares of major auto manufacturers and car dealerships nationwide. On top of the macro environment challenges, the market was hit by cyber attacks in June 2024. On June 20, CNN reported that the US and Canadian dealership market stood still due to a cyber attack incident at a data provider called CDK Global. CDK Global data is used by more than 15,000 auto dealers across all major countries. While not all auto dealers use CDK to process orders, those that did faced slower sales growth during the quarter.
As per Reuters, the overall new vehicle sales throughout the US in June 2024 stood at 1.32 million units, representing a seasonally adjusted annualized rate of 15.29 million units during the year. Moreover, affordability also remains one of the key concerns for the market, due to which inventories are not expected to advance as strongly as they did over the past 12 months.
Looking ahead, according to the latest Cox Automotive Dealership report on June 10, the Cox Automotive Dealer Sentiment Index (CADSI) remained stable from the first quarter to the second quarter of 2024. The current market index score for Q2 is 42, which suggests that US auto dealers perceive the market to be weak. For context, the score was 45 a year ago and below the threshold of 50. Moreover, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a score of 51 in Q1 to 44 in Q2. The downward trend is attributed to the weaker tax refund season and the ongoing political instability due to elections. To read more about the automotive industry you can look at the 7 Best Small Cap Automotive Stocks to Buy.
Our Methodology
To compile our list of the 7 best auto and truck dealership stocks to buy, we used the Finviz stock screener. We selected Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a metal oil pump in an oil refinery, a key part of the company’s production.
Valvoline Inc. (NYSE:VVV)
Number of Hedge Fund Holders: 34
Valvoline Inc. (NYSE:VVV) is a leading provider of automotive services and premium branded lubricants. The company operates and franchises vehicle service centers and retail stores in the United States and Canada. The service centers of the company provide various services including fluid exchange for motor oil, coolants, and transmission, replacement parts for batteries, filters, belts, and safety services. Valvoline Inc. (NYSE:VVV) has operations in more than 1,850 service center locations and supports nearly 300 locations through its Express Care platform. Some of the key customers of the company include passenger vehicle owners including electric, hybrid, and gasoline cars, and owners of light and medium-duty vehicles.
The company has a strong brand presence in the automotive lubricant industry with a history dating back to 1866. Moreover, the wide range of oil and non-oil services including battery replacement business not only allows Valvoline Inc. (NYSE:VVV) to generate revenue from multiple streams but also gives it a competitive edge to capitalize on the growing electric vehicle segment in the future.
The company posted a successful second quarter of 2024, with significant growth in revenue and profitability. The top line of the company grew across its network with system-wide same-store sales growing 13% year-over-year to reach $746 million. Profitability throughout the quarter was also encouraging with adjusted EBITDA growing by 21% to reach $105 million and earnings per share improving 60% to $0.37 per share, outperforming analyst expectations by $0.02. Valvoline Inc. (NYSE:VVV) also increased its market share by adding 38 new stores to its network, including 14 franchises. Management attributed its robust sales growth to strong labor management and improved supply chain costs.
Is Valvoline Inc. (NYSE:VVV) a good investment?
VVV is an investors’ favorite. It was held by 34 hedge funds during Q1 2024, with total stakes worth $718.049 million. Its earnings are expected to grow by 18% this year to reach $0.46. Moreover, the company’s strong balance sheet with more than $756 million in cash and cash equivalents offers it room for growth in the future. 13 analysts hold a consensus Buy opinion on the stock and their 12-month median price target of $48.50 implies an upside of 13% from current levels.
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.”
Overall VVV ranks 6th on our list of the best auto and truck dealership stocks to buy. You can visit 7 Best Auto and Truck Dealership Stocks to see the other auto and truck dealership stocks that are on hedge funds’ radar. While we acknowledge the potential of VVV as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VVV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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