Take 5 Oil Change Expansion And Debt Reduction Will Improve Future Prospects

Key Takeaways

• Strategic expansion and partnerships, including Take 5 Oil Change and Auto Glass Now, are expected to boost revenue through growth and predictable commercial accounts.
  
• Streamlining operations with debt reduction, asset management, and improved cost optimization should enhance net margins and overall earnings efficiency.
  
• Weather disruptions, inflationary pressures, and franchise reliance pose risks to revenue growth and stability, while ambitious deleveraging goals face operational and market uncertainties.

Catalysts

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

• The expansion of the Take 5 Oil Change brand, including a robust pipeline of 1,000 sites and plans to double the franchise store count, suggests significant future revenue growth for Driven Brands.
  
• Driven Brands' strategy of using excess free cash flow for debt reduction and portfolio management, including selling lower priority businesses, aims to improve net margins by lowering interest expenses and simplifying operations.
  
• The introduction and growth of Driven Advantage, an online marketplace, is expected to enhance earnings by optimizing costs and increasing the purchasing power of company stores and franchisees.
  
• The strategic focus on capturing long-term commercial partnerships, particularly in the Auto Glass Now segment, is projected to bolster revenue through sustained and predictable commercial accounts.
  
• Ongoing improvements in adjusted EBITDA margins and focused operational efficiencies, such as centralized purchasing and labor optimization in the Take 5 Oil Change brand, are likely to enhance overall net margins and earnings over time.

Driven Brands Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Driven Brands Holdings's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $294.4 million (and earnings per share of $1.82) by about February 2028, up from $6.2 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 14.1x on those 2028 earnings, down from 393.0x today. This future PE is lower than the current PE for the US Commercial Services industry at 29.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.2%, as per the Simply Wall St company report.

Driven Brands Holdings Future Earnings Per Share Growth

Risks

• The impact of significant weather events, such as hurricanes, has led to disruptions in operations, affecting over 500 locations and resulting in substantial revenue losses, which could continue to pressure revenue and affect the company's financial performance if such events persist.
  
• Persistent inflationary pressures are expected to continue impacting consumer spending, particularly among lower-income households, potentially affecting Driven Brands' revenue growth and margins.
  
• The reliance on franchised operations for growth, while providing a robust pipeline, introduces a level of risk related to the franchisees' ability to execute, which can impact long-term earnings and revenue stability.
  
• Challenges in the U.S. Car Wash segment, exacerbated by weather and the need to grow the membership base to reduce weather dependence, present risks to consistent revenue generation and margin stability.
  
• The ambitious goal to reduce leverage to below 3x by 2026 may be subject to uncertainties in asset sales and operational cash flow generation, which could materially impact net earnings and financial stability if not achieved.

Valuation

• The analysts have a consensus price target of $18.85 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 $22.0, and the most bearish reporting a price target of just $14.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $294.4 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of $14.92, the analyst price target of $18.85 is 20.8% 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.