A holding in our Small-Cap Premier Quality Strategy, Valvoline (NYSE: VVV) is a leader in the large and fragmented automotive preventive maintenance services market. We believe Valvoline has a long runway for growth, with the potential to double its earnings over the next five years, since becoming a more focused operation following the divestiture of its Global Products business in March 2023.

Oil changes, tire rotations, battery replacements, and other preventive maintenance services are largely unaffected by economic cycles, having remained robust, for example, during the 2008-09 recession. Valvoline thus operates in a highly resilient industry, highlighted by the company’s consistent revenues, high customer retention, and more than 15 consecutive years of same-store sales growth.

Valvoline’s competitive edge is enhanced by its scale, company culture, and relationships with franchisees, which bolster its ability to consolidate a still fragmented industry. Annually, 450 million oil changes are performed in the U.S., where Valvoline has just a 5% market share. More than half of these oil changes are handled by quick lube locations (such as Valvoline) and car dealerships, with remainder serviced via do-it-yourselfers (“DIY”), tire stores, and other installers. Quick lubes are preferred for their cost-effectiveness and convenience. Valvoline can usually save customers up to 20-30% on these services compared to dealerships due to lower overhead costs and streamlined operations.

Additionally, Valvoline’s quick service model offers oil changes and other maintenance tasks in approximately 15-20 minutes, whereas dealerships may require appointments and longer service windows. This efficiency, along with the increasing complexity of modern vehicles and consumers’ preferences for convenience, is propelling the shift from DIY to professional services. Furthermore, a critical ‘rate of change’ moment in the industry—driven by a shortage of mechanics—has catalyzed quick lubes to capture additional market share from dealers as the latter perform often complicated repairs that require more highly skilled mechanics. Valvoline notes that 40% of its new customers come from dealerships.

Sixty percent of U.S. quick lube operators have one to five locations and often lack the operational capabilities, service breadth, and marketing prowess that Valvoline brings. Jiffy Lube, the number one player, is a small part of the Royal Dutch Shell portfolio and offers inferior service as customers must leave their cars and wait, which costs them time and, occasionally, trust compared to Valvoline’s drive-through operations. Take 5, another competitor, struggles with a debt-heavy balance sheet, which impacts its competitiveness.

We find the financial attributes of Valvoline’s business model highly attractive and like that management approaches growth opportunities in a data-driven, shareholder-oriented way. The company maintains robust gross margins of around 40%, indicative of its efficient operations and strong pricing power. Valvoline also operates a capital-light model, with new stores requiring less than 10% of Capex relative to sales, which underscores the efficiency of its expansion strategy. The company’s strategic plan includes doubling its store count through the 2020s as it leverages underpenetrated geographic markets. With only 15% of U.S. households within a five-mile radius of a Valvoline location, there is significant room for expansion.

Partnering with well-capitalized franchisees allows Valvoline to grow its footprint in a capital-efficient manner, minimizing direct investment risks while maximizing geographical coverage. New store development follows a repeatable real estate process, and returns on investment generally exceed twice the cost of capital. The company is also aiming to increase store efficiency, targeting service for 70 cars per day, up from 50 and reflecting operational improvements and capacity expansion. This strategic approach drives growth and does so with a great deal of capital efficiency, ensuring sustainable expansion and value creation.

While skeptics may point to the rise of electric vehicles (“EVs”) as a threat to Valvoline’s traditional oil change business, we think this evolving market landscape actually enhances the investment opportunity. Despite the growing presence of EVs, they currently constitute less than 2% of all vehicles in the U.S. Demand for oil changes is thus not expected to decrease significantly over the next 5 to 10 years. In addition, the average age of light vehicles in the U.S. is rising, which further drives the need for maintenance on internal combustion engines (“ICE”). Valvoline appears well-positioned to benefit from this transition by adapting its service offerings to cater to the unique needs of EVs, such as more frequent tire rotations due to the heavier weight of EVs, detailed battery health checks, and specialized thermal management fluids. These services, which extend beyond traditional ICE vehicle maintenance, will likely see increased demand as EV penetration, expected to reach 10% of new car sales by 2025, continues to rise.

We see Valvoline as a high-quality, recession-resistant business with robust recurring revenue. We also like that its shares currently trade at an attractive cap rate of just above 5%—which bolsters our contention that the company enjoys a long runway for potential growth.

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