Valvoline Is A Solid Business, But Upside May Already Be Priced In

Morgan Stanley’s Simeon Gutman believes the share price for Valvoline Inc VVV “appropriately reflects the company's fundamental prospects.”

Gutman initiated coverage of the company with an Equal-weight rating and price target of $26.

Upside Drivers

The analyst expects the company’s EBITDA multiple expansion to be driven by margin stability in its Core North America business, and believes that Valvoline is capable of generation top line growth of 4-5 percent and bottom line growth of 8-10 percent.

“VVV offers an intriguing mix of consistency and upside optionality,” Gutman mentioned, while adding “The consistency stems from the CPG-like Core North America business, from which the iconic Valvoline brand is sold into major retail chains and auto repair facilities.”

The analyst also believes that potential upside could be driven by the rapidly growing Valvoline Instant Oil Change (VIOC) and the company’s international divisions, where it has distinctive competitive advantages that are expected to lead to share gains and margin expansion.

Mitigating Factors

“While we see potential upside from these growth kickers over time, particularly in the VIOC business, we see near-term risk to gross profit per gallon sold, a key financial metric,” Gutman stated.

In addition, Gutman believes that price controls and mix would continue to benefit Valvoline, although they might be offset by rising oil prices and declining upside from excess capacity.

“These potential offsets temper our enthusiasm on near- to medium-term upside,” the analyst added.

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