VVV - Valvoline

[Okonomen]

I'll try to make this brief. I am baffled by the severe price plunge in VVV after the oil price drop + corona panic. First I will quickly go through the VVV biz model and then argue why I think the market is overreacting, and feedback is welcome

 

VVV was spun off from Ashland in 2016. VVV produces and distributes motor oil under the "Valvoline" brand which is even older than Coca Cola! VVV was established in 1867. They got 3 segments

 

Core NA: Sale of motor oil to retailers (Autozone etc) and mechanics (Do-It-For-Me). This is a steady cash cow generating nice returns and cash flow is redeployed into the growing quick lube segment. Expect this segment to decline moderately 1-2% a year

 

International: same as core NA just outside the US. This segment is growing ~5% annually

 

Quick Lubes: This is the crown jewel. Retail locations where customers can get oil change and smaller maintenance work done but no repairs. The franchise/company owned split is 60/40. This segment is growing nicely with HSD SSS numbers and good ROIC with a long runway. VVV has around 1400 QL's in the US constituting around 15% of the market. Within 2024 they want to reach 1700 QL's. The market is flooded with mom & pops and lazy competitors, so VVV has been very succesful in competing and stealing market share from mom & pops and bigger QL chains like Jiffy Lube - a sleeping franchise owned by Pennzoil which is owned by Royal Dutch Shell and probably gets no strategic attention at HQ since Jiffy Lube make up less than 1% of both sales and profits

 

Oil is mainly a pass-through cost for VVV as oil price changes gets reflected in the customer contracts within 3-6 months or sometimes even quicker. This means that the recent oil price plunge should in fact be benificial for VVV short-term before contracts are renegotiated. At the same time, lower oil prices induces people to drive more resulting in more oil changes due to miles driven. However, the corona panic probably has a severe opposite effect on miles driven currently. The uncertainty regarding traffic in the QL's during this corona outbreak is probably quite high, but it won't last forever even though the market seems to be thinking that...

 

VVV's share price has plummeted from 23 to 14 USD in 2020 and currently it trades around or under 10x earnings despite this being a growing macro resilient business with +30% ROIC and a good management team with skin in the game. No matter the economy, oil must be changed once in a while, and one could even argue that if a recession hits hard, the avg car age will increase leading to more oil changes (newer cars requires less frequent oil changes)

 

I don't want to start a discussion about whether or not EV's will take over the world, and in this regard I see no evidence of this happening anytime soon in the US. USA has ~300m cars on the road and ~0% is non-ICE. VVV will have many many years to adapt their biz model to a potential change in this regard.

 

Even though VVV may experience a period of adverse effects from the corona outbreak, I have a fair value estimate around 25-30 USD for this company

[Spekulatius]

Been following this company after a fellow from smart Twitter 3:10 Value posted about it.

https://twitter.com/310value/status/1224734872947843073?s=21

 

Got some issue with debt, pensions and the core business not growing and perhaps shrinking. COVID-19 will affect quick lube business because people are driving less and probably defer going to an oil change place even if the car is due.

[Okonomen]

Been following this company after a fellow from smart Twitter 3:10 Value posted about it.

https://twitter.com/310value/status/1224734872947843073?s=21

 

Got some issue with debt, pensions and the core business not growing and perhaps shrinking. COVID-19 will affect quick lube business because people are driving less and probably defer going to an oil change place even if the car is due.

 

I don't see this as having anything to do with the recent development. Debt is no issue. They got 1,3 bUSD in debt ~ 2,3x EBITDA (pre corona effect) for a business with very nice recurring revenue no matter the economy. The pension liability of 300 mUSD is no problem at all either. The debt and pension stems from the spin off in 2016. Core NA is experiencing a very slow decline in volumes which is more than offset by growth in the QL segment and in international. All this information is old news and should not have anything to do with the price drop.

 

Im trying to figure out if there is anything I have missed recently regarding the effect on VVV. Otherwise I think this is a very attractive price