Morningstar | Signs of Stabilization in Valvoline’s Second-Quarter Results Highlight Opportunity in Shares
Our $21 per share valuation for narrow-moat Valvoline should not change significantly after it posted second-quarter earnings. We are encouraged that the North American lubricant unit’s margin trajectory improved, in line with our favorable view of its long-term advantages amid a premiumization trend. We still expect mid-single-digit top-line growth against high-teens adjusted operating margins long term and see the shares as attractive.Valvoline saw 3% first-half sales growth against a 19% adjusted EBITDA margin. Management cut fiscal 2019 guidance (reflecting raw material cost pressure we expect to abate over time), calling for 5%-7% sales growth (previously 6%-8%), adjusted EBITDA of $460 million to $470 million (from $470 million to $485 million), and adjusted diluted EPS of $1.27-$1.33 (versus $1.31-$1.39). Our pre-announcement marks were 5.7%, $465 million, and $1.34, respectively.
The North American lubricants unit (about 45% of sales) struggled amid DIY channel competition and installer volume pressure, but we are encouraged that efforts to optimize promotions improved results, with second-quarter adjusted EBITDA margin down only 127 basis points (to 18.1%) versus the first quarter’s over-360-basis-point swoon. We expect stabilization, with improving premium mix (52% of year-to-date segment volume, up 290 basis points from a year ago) putting Valvoline in a stronger position as new engines increasingly need sophisticated lubricants.
The quick lube unit (around 30% of sales) saw stellar results, with quarterly same-store sales up nearly 11%. The success is especially encouraging considering Valvoline’s recent acquisitions in Canada and joint venture with Master Too to develop a similar system in China, with three stores opened in the quarter. It will take time to build density (limiting its impact on our explicit forecast), but we believe the concept should translate, creating a new avenue for growth beyond Valvoline’s international lubricant sales.
Valvoline is a marketer and supplier of engine and automotive maintenance products and services. The company's segments are: Quick Lubes, which services the passenger car and light truck quick lube market via the company-owned, independent franchises and joint venture retail quick lube service center stores, as well as independent Express Care stores that service vehicles with the company's products; Core North America, which sells Valvoline? and other branded and private label engine and automotive maintenance products in the United States and Canada; and International, which sells Valvoline? and other branded engine and automotive products for the maintenance of consumer and commercial vehicles and equipment.
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