Accelerated Expansion And Fleet Growth Will Strengthen Market Presence By 2027

Key Takeaways

• Network and fleet growth strategies, including store expansions and market penetration, are key drivers for revenue and market share improvements.
  
• Technological investments and refranchising efforts aim to enhance operational efficiencies and support sustainable earnings growth.
  
• Political changes, competitive pressures, rising costs, tech investments, and refranchising strategy could challenge Valvoline's margins, sales growth, and short-term financial performance.

Catalysts

Engages in the operation and franchising of vehicle service centers and retail stores in the United States and Canada.

• Valvoline is focusing on accelerating network growth by targeting 250 new stores per year by 2027, a move expected to drive revenue growth through an expanded market reach and increased market share.
  
• The maturation of currently immature stores is anticipated to contribute an additional $70 million in EBITDA, improving net margins as these stores ramp up to full operational capacity over the next 3-5 years.
  
• Valvoline's strategy includes significant refranchising efforts, which are intended to enhance long-term earnings growth by leveraging franchise partners to drive expansion more efficiently, maintaining a healthy balance sheet and allowing capital reallocation.
  
• Investment in technological modernization and talent, such as new ERP and HRIS systems, aims to improve efficiencies and scale, thereby enhancing operational margins and supporting long-term earnings growth.
  
• Growth in Valvoline's Fleet business, with a historical CAGR of transactions over 14%, suggests a promising contribution to revenue growth due to an expanding market for fleet services and a focus on increasing activation and new account acquisition.

Valvoline Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valvoline's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.2% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $248.4 million (and earnings per share of $1.98) by about December 2027, up from $214.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.3x on those 2027 earnings, up from 22.6x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Valvoline Future Earnings Per Share Growth

Risks

• The uncertainty around political administration changes and their economic consequences, such as tariffs and labor impacts, could create volatility in costs and potentially squeeze profit margins.
  
• The competitive promotional activity from other automotive service providers may impact Valvoline's ability to attract new customers, which could pressure same-store sales growth and overall revenue.
  
• The rising labor costs due to inflation and wage pressures, especially if countered by only moderate price increases, may lead to margin compression and reduced profitability.
  
• The need for significant investments in technology modernization and talent to scale the business could result in modest deleverage in G&A, constraining EBITDA growth despite increasing revenues.
  
• The refranchising strategy, while capital-efficient in the long term, may initially be dilutive to financial performance, potentially impacting short-term revenue and EBITDA growth expectations.

Valuation

• The analysts have a consensus price target of $43.75 for Valvoline 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 $49.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $248.4 million, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 7.5%.
• Given the current share price of $37.78, the analyst's price target of $43.75 is 13.6% 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.