With the Republican sweep of the legislative and executive branches, the market is pricing in the likelihood of potentially lowered corporate tax rates that could benefit companies like Valvoline Inc. (VVV), a leading service center with over 2,000 franchises and company-run locations. The company has shown robust growth, boasting a 19% increase in reported income and a 12% increase in sales from ongoing operations in the most recent quarter. Plans for further expansion of its retail network are underway, emphasizing franchising. Valvoline’s financial stability and expansion strategy suggest promising potential for future growth.
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Valvoline Is a Likely Beneficiary of Potential Tax Relief
Valvoline operates over 2,000 franchised and company-managed service centers throughout the U.S. and Canada, performing more than 28 million services each year on a system-wide scale. These services range from 15-minute oil changes in customers’ cars to manufacturer-recommended maintenance tasks such as tire rotations and wiper replacements.
Jefferies (JEF) analysts have recently assessed the potential impacts of tax reform under a possible second Trump administration for public U.S.-based companies. The expected benefits are predicted to be smaller than the effects of Trump’s 2018 tax reform, owing to the current lower maximum rate of 21% and uncertainty around the future maximum rate. This possible relief may provide some financial boost, especially for companies presently paying the full rate, with smaller cap companies and those within consumer, materials, financials, and industrial sectors likely to see the largest benefits.
Valvoline is specifically highlighted as a potential beneficiary of lower corporate tax rates due to its tax rate of 25.5% in 2024. Analyst Bret Jordan suggests that a 5% reduction in corporate tax could decrease the company’s 2025 rate from around 25% to 20%, subsequently driving a 6% increase in adjusted EPS.
Valvoline’s Recent Financial Results
The company recently announced a strong performance in the fourth quarter, achieving a 12% increase in sales from ongoing operations, which amounted to $436 million. This is attributed to system-wide same-store sales growth of 5.4% despite the Crowdstrike outage and several hurricanes that occurred in the period. The EBITDA from continuing operations increased by 14% to $124 million, and adjusted earnings per share (EPS) increased by 18% to $0.46.
The company ended the quarter with a cash and equivalents balance of $68 million and a total debt of $1.1 billion after repurchasing all outstanding 2030 Senior Notes in Q3. The operating cash flow from continuing operations for the year was $283 million, with free cash flow at $59 million. Fiscal 2024 also saw the company return $227 million in cash to shareholders via share repurchases, with a remaining authorization for $385 million in share repurchases.
VVV’s management has issued guidance for the Fiscal year 2025, projecting growth in same-store sales from 5.0% to 7.0% and network growth to include 160 to 185 stores. Top-line sales are anticipated to grow by 10% to 14%, ranging from $1.67 billion to $1.73 billion, yielding $450 million to $470 million of adjusted EBITDA.
Is VVV Stock a Buy?
The stock has been relatively range-bound recently, earning a 2.63% return year-to-date. It trades near the lower-middle of its 52-week price range of $33.86 – $48.27 and shows negative price momentum as it trades below all major moving averages. Despite the decline, with a P/E ratio of 23.8x, it trades at a slight premium to the Auto & Truck Dealerships industry average of 22x.
Analysts following the company have been mostly bullish on VVV stock. Based on the aggregate recommendations of nine analysts, Valvoline is rated a strong buy overall. The average price target for VVV stock is $43.67, representing a potential 13.22% upside from current levels.
Valvoline in Summary
Valvoline is riding the wave of possible tax relief, coupled with the support of a strategy that includes further expansion of its retail network. The company has shown solid performance in the face of a challenging environment. Despite some market volatility, the combination of tax benefits, corporate growth, and enduring market presence positions Valvoline as a strong player with upside potential.
