Take 5 Oil Change Expansion Will Drive Future Success

Key Takeaways

• Strategic resegmentation and focus on high-growth Take 5 Oil Change could drive substantial revenue and EBITDA growth through store expansion and same-store sales.
  
• Auto Glass Now's momentum in insurance and commercial sectors positions it as a significant future growth lever enhancing profitability.
  
• Inflation and strategic shifts, including the car wash divestiture, may pressure revenue and investor confidence, impacting growth and financial performance.

Catalysts

Provides automotive services to retail and commercial customers in the United States, Canada, and internationally.

• Driven Brands plans to use excess cash flow to reduce debt, aiming to reach a net leverage target of less than 3x by year-end 2026, which could improve net margins by reducing interest expenses.
  
• The strategic sale of the U.S. car wash business will allow the company to focus more on high-growth and high-margin segments like Take 5 Oil Change, potentially boosting overall earnings.
  
• The re-segmentation of business units highlights the focus on Take 5 Oil Change, a high-growth area with plans for significant unit expansion, which could drive significant revenue and EBITDA growth.
  
• The Take 5 Oil Change segment intends to expand its store count significantly and continues to exhibit strong same-store sales growth, contributing to increased revenue and EBITDA in the coming years.
  
• The Auto Glass Now division is gaining momentum in the insurance and commercial sectors, positioning it as a future growth lever that could enhance revenue and profitability as it scales.

Driven Brands Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Driven Brands Holdings's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -12.3% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $249.2 million (and earnings per share of $1.56) by about May 2028, up from $-287.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from -9.6x today. This future PE is lower than the current PE for the US Commercial Services industry at 27.7x.
• Analysts expect the number of shares outstanding to decline by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.26%, as per the Simply Wall St company report.

Driven Brands Holdings Future Earnings Per Share Growth

Risks

• The ongoing inflationary environment is expected to continue to pressure consumer spending, particularly affecting lower-income households, which could impact Driven Brands' revenue growth and overall sales performance.
  
• The company is selling its U.S. car wash business, which previously contributed approximately $50 million to adjusted EBITDA. The divestiture means a reduction in revenue and earnings from this segment going forward.
  
• Ongoing strategic shifts, such as the reclassification of segments and the sale of the U.S. car wash business, may lead to uncertainty in investor expectations and could impact market confidence, potentially affecting stock performance and valuation.
  
• The focus on reducing net leverage and paying down debt, while beneficial for financial health in the long run, could limit short-term investment in growth opportunities, possibly affecting revenue growth and profit margins.
  
• Inflationary pressures and potential tariff impacts could lead to increased costs, challenging margins, particularly if price increases to customers are not possible or competitive pressures prevent full cost passthrough.

Valuation

• The analysts have a consensus price target of $20.083 for Driven Brands Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $249.2 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 9.3%.
• Given the current share price of $16.74, the analyst price target of $20.08 is 16.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.