Refranchising And Tech Investments Will Yield Robust Yet Uncertain Outcomes

Key Takeaways

• Strategic network expansion and refranchising initiatives are expected to boost store count and drive revenue growth.
  
• Technology and training investments will likely enhance customer satisfaction and operational efficiency, supporting increased sales and potentially improving net margins.
  
• Increased SG&A, refranchising uncertainties, and potential sales deceleration could pressure margins and affect revenue, with economic factors influencing earnings stability.

Catalysts

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

• Valvoline's strategic focus on accelerating network growth through both refranchising efforts and commitments from new franchise partners is expected to drive significant store count expansion, which will likely boost revenue growth.
  
• Investments in employee training and customer experience are anticipated to improve customer satisfaction and retention, enhancing revenue through increased same-store sales and potentially expanding net margins through greater efficiency.
  
• Emphasis on non-oil change services, supported by new training and process improvements, is expected to continue to drive ticket growth, contributing to sustained same-store sales growth and increased revenue.
  
• The push for greater transaction growth, evident from the recovery in transaction volumes despite weather impacts, indicates a forward momentum that could enhance revenue streams and operational leverage.
  
• Ongoing technology investments aimed at supporting retail growth and scaling the business could result in operational efficiencies, eventually translating into increased net margins or improved overall earnings.

Valvoline Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valvoline's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.5% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $191.1 million (and earnings per share of $1.72) by about April 2028, down from $274.5 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 34.5x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the US Specialty Retail industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

Valvoline Future Earnings Per Share Growth

Risks

• Increased SG&A due to technology investments could put pressure on net margins if revenue growth does not outpace these costs.
  
• The impact of refranchising transactions might reduce reported revenue and EBITDA, potentially affecting earnings if the new franchise partners do not perform as expected.
  
• Potential deceleration in same-store sales due to tougher pricing and non-oil change comparisons, coupled with the impact of leap day, might impact revenue growth.
  
• Changes in waste oil recovery prices could impact margins, although the company expects lower product costs to offset this; any deviation in this expectation might affect profitability.
  
• Economic or weather-related disruptions, like those experienced previously, could cause fluctuations in customer transactions, impacting overall revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $43.192 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 $48.0, and the most bearish reporting a price target of just $38.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $191.1 million, and it would be trading on a PE ratio of 34.5x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $33.21, the analyst price target of $43.19 is 23.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.