Store Expansion And EV Risk Will Redefine Auto Maintenance

Key Takeaways

• Strategic store expansion, acquisitions, and premium service offerings are fueling broader geographic reach, higher service capacity, and stronger long-term revenue growth.
  
• Operational efficiencies and rising demand for professional, convenient maintenance are expanding margins and bolstering overall profitability.
  
• Dependence on traditional oil change services, rising competitive and labor pressures, and the shift to electric vehicles threaten Valvoline's long-term revenue stability and growth.

Catalysts

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

• The consistent growth in same-store sales-driven by both increased transactions and higher ticket sizes from premium service offerings-suggests the company continues to benefit from a durable trend of more vehicles on the road aging and requiring ongoing maintenance. This supports stable and potentially growing revenue and earnings over the long term.
  
• Aggressive store expansion through both company-owned and franchise models, plus ongoing acquisition of independent operators, is increasing Valvoline's geographic reach and service capacity. This is a forward-looking catalyst for topline revenue growth and improved return on invested capital.
  
• Upward shift in consumer demand toward professional, fast, and convenient auto maintenance services, away from do-it-yourself, is driving additional service volumes to Valvoline. This bolsters revenue growth and expands the company's addressable customer base.
  
• Continued execution on operational efficiencies, including labor management improvements and digitalization of scheduling, demand planning, and customer engagement, is expected to drive EBITDA margin expansion and lower costs over time-supporting improved net margins and profitability.
  
• Expansion of premium services (full synthetic oil changes, NOCR, fleet management, and digital/loyalty programs) is improving the service and product mix, resulting in higher average ticket sizes and gross margins-which is a direct catalyst for enhanced earnings growth.

Valvoline Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valvoline's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.4% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $194.6 million (and earnings per share of $1.25) by about August 2028, down from $278.3 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 35.3x on those 2028 earnings, up from 17.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

Valvoline Future Earnings Per Share Growth

Risks

• Accelerating adoption of electric vehicles (EVs) globally poses a structural risk to Valvoline's core oil change and preventative maintenance business, as EVs require significantly less traditional service-threatening long-term revenue growth and market size.
  
• Increasing regulatory pressure and government incentives for emissions reduction and sustainability could further accelerate the internal combustion engine (ICE) to EV shift, directly limiting Valvoline's customer base and undermining long-term earnings forecasts.
  
• Valvoline remains heavily reliant on quick lube and oil change revenue, with limited diversification outside the U.S., increasing concentration risk and making the company vulnerable to evolving maintenance needs and U.S.-specific economic cycles-potentially impacting revenue consistency and growth.
  
• Rising wage and labor costs for service bay technicians, in the context of a tight labor market, could compress operating margins if not offset by continued price increases and operational efficiency-negatively affecting net margins and overall earnings power.
  
• Expanding competitive threats from national quick lube chains, dealer service networks, and direct-to-consumer automotive service models (such as mobile and at-home service apps) may drive pricing pressure and market share loss, limiting Valvoline's ability to sustain revenue growth and profit margins.

Valuation

• The analysts have a consensus price target of $43.308 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 $37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $194.6 million, and it would be trading on a PE ratio of 35.3x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $37.91, the analyst price target of $43.31 is 12.5% 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.