Valvoline Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Valvoline Inc. is a global leader in automotive preventative maintenance, delivering lubricants, engine oils, and car care products as well as offering services to both do-it-yourself and do-it-for-me customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Valvoline’s moat is rated a 3 out of 5, indicating a narrow but reasonably defensible competitive advantage. This rating is based on several factors:

Brand Recognition: Valvoline has a globally recognized “V” logo and brand name, with a history of over 150 years. It is also the first-ever trademarked oil brand. This is recognized in 140 countries and is a major asset when it comes to customer loyalty.
Established Distribution Network: With 1,600+ service centers in the US and Canada, Valvoline boasts an extensive distribution network and established relationships with franchisees and other retailers, giving it a broad reach in North America.
Customer Loyalty: The company fosters repeat business from its customers using their own proprietary systems, which integrate into the customer experience and create higher customer retention. However, customers can easily switch to different service locations and oil brands.
Unique Supply Agreements: Valvoline has a long-term supply agreement with Global Products, allowing them to purchase all of their lubricants and certain ancillary products at predetermined prices, limiting cost uncertainty and creating solid margins.
Franchise model: A vast majority of their locations are franchise-operated, allowing Valvoline to grow their presence and brand loyalty while passing on expansion costs to franchisees.
High Returns On Invested Capital (ROIC): Valvoline has consistently shown good return on capital, suggesting that it has some advantage over its competition.

However, certain factors limit Valvoline’s moat:

Limited Switching Costs: Consumers can relatively easily switch to other auto maintenance brands and service providers. This is especially true for the oil and other products they use because they are largely undifferentiated commodities.
Competitive Landscape: While Valvoline is a large player, it still faces significant competition from well-established brands and other players in the auto maintenance services industry and especially with oil refiners. While they have several competitive advantages over rivals, they aren’t enough to make the company invulnerable to competition.
Exposure to Economic Cycles: While car maintenance is always needed, its a cyclical industry and the demand for new car maintenance can swing with economic conditions.

Risks to Valvoline’s Moat and Business Resilience:

Competition: Valvoline operates in a highly competitive market and increased competition could reduce its market share, depress pricing, and squeeze margins.
Input Costs and Supply Chain Disruptions: Fluctuations in oil prices, raw material costs, and supply chain disruptions could raise production costs and put a strain on margins.
Erosion of Brand Value: Changes in consumer trends and preferences, or damage to its brand reputation, could diminish Valvoline’s pricing power.
Technological Disruption: Technological innovation in alternative automotive maintenance, or a shift towards electric cars that require less maintenance could pose a long-term threat.
Economic Uncertainty: A recession, declining economic conditions, and changes in spending patterns could hurt demand for Valvoline’s services.

Business Overview:

Valvoline operates in two segments: Retail Services and Global Products.

Retail Services: This segment primarily consists of quick-lube service centers and franchised locations that provide oil changes, preventive maintenance, and other car services. It generates revenue through selling services to customers that are do-it-for-me. This includes both company operated and franchised locations and revenues are recognized at the point of service delivery.
Valvoline reports that average revenues per system-wide retail store were $1.96 and $2.22 million for the fiscal years of 2022 and 2023 respectively. Valvoline is aggressively adding new stores, with plans for expansion into new markets in the coming years.
Global Products: This segment primarily consists of lubricants and chemicals sold to resellers that then sell to both end-users or provide the products for use with their services. The Global Products business operates in more than 140 countries. Revenues here are recognized when the products are shipped.
In 2023, after the sale of Global Products, their total revenues amounted to $2.5 billion, of which 17%, or $435.5 million came from Retail Services, and $2.1 billion from global Products (that was owned until the sale).

Valvoline recently sold its Global Products business to Saudi Aramco for $2.65 billion to primarily focus on their Retail Services business.

The industry as a whole is fairly fragmented, with a few large players and a large tail of smaller players. Competition in automotive maintenance has increased due to the large number of chain stores and small mom and pop operations, but Valvoline has a loyal customer base due to its brand recognition, speed, and convenience. With the rise of electric vehicles, the need for maintenance is expected to be less over the coming decades. This poses a risk for the long term growth of the business.

Financials

Revenues: As stated earlier, Valvoline has total sales of $2.5 billion, of which, $435 million comes from its Retail Services business, and $2.1 billion came from the Global Products business (that was owned for most of the year).
Margins: Gross profit margin improved for the three months ended March 31, 2024 compared to the prior year period, primarily due to better efficiency from effective cost management, increased price realization, and product mix improvements. Net margins seem to fluctuate more over the short term due to multiple factors and should be examined more over long term to see long term implications.
Capital Expenditure: VVV has been steadily increasing its capital expenditures as they ramp up their expansion of retail locations. In its latest 10K, they spent 52.8 million in capital expenditure, however they note that they have $169.9 million allocated for new leases as well as $115 million that is allocated for infrastructure projects. They expect to accelerate capital spending in the next 3 years.
Free Cash Flow: As the company is focusing on Retail Services only after the sale of the Global Products business, free cash flow generation should be more predictable and consistent. Valvoline has very strong and stable free cash flows from operations that the company can use to expand further. In its latest quarterly filings, Valvoline has generated $323.5 million from operating cash flows and free cash flow was $110.3 million after deducting $56.5 million for capital expenditure.
Profitability: ROIC from its global businesses have generally been above 10% and have recently improved above 20% for the Retail Services business, after changes have been made to the business. The goal is to maintain a higher ROIC of 17%-20%.
Balance Sheet: Valvoline has a healthy balance sheet with cash and short-term investments of $448 million, however they have a large debt balance of $1.2 billion. The net debt position for Valvoline is close to 1 billion. Their total debt, though high, is still at sustainable levels and they have flexibility to repay or refinance the debt if they choose to.
They have a very diverse portfolio of maturities on their debt that can be seen in their latest 10Q, with 180 million due in 2025, and 285 and 430 million due in 2026 and 2027 respectively, while they also have 500 million in 2030 and 355 million in 2031 and 2033.
Share Repurchases and Dividends: They have a share repurchase authorization in place at 1 billion dollars to return cash to shareholders. They also pay a consistent dividend with an aim for it to grow over time.

Understandability: 3 / 5 Valvoline is fairly easy to understand as a business but there are a few complicating factors. The main business is simple as an automotive service provider with a global product and service brand, offering oil changes and other maintenance, which is something that most people interact with and understand. The complexity is in separating out their finances and the financial performance of each segment separately since they just sold off one major segment.

Balance Sheet Health: 4 / 5 Valvoline’s balance sheet is relatively healthy with a high cash balance. The company has a high debt load, but it is manageable at the moment, especially given consistent free cash flows.

Recent Concerns/Controversies:

The recent sale of Global Products for a large sum is a change for the company, this adds complexity in analysis, but also gives flexibility for growth and potential for the company to perform better and generate more profit from its retained operating assets.
Inflation: VVV is susceptible to macro events, especially inflation, which can affect consumer demand and increase the company’s input costs. Management has stated in its most recent 10Q that inflationary pressures could affect the business, especially with higher labor costs.
The company mentions in its risk report that there is a reliance on data protection and cybersecurity in the business, and there have been data breaches in the past that have led to costs and operational difficulties.
The company’s performance is strongly tied to consumer sentiment and spending. Changes to the economy and to how much people are willing to spend on car maintenance will also strongly affect Valvoline’s business.