Today we have a speculative idea: take shares of the American manufacturer of automotive oils and lubricants Valvoline (NYSE: VVV), in order to earn on the growth of demand for the company's products.
Growth potential and validity: 14% behind 14 months excluding dividends; 9% per annum during 10 years including dividends.
Why stocks can go up: there is a demand for the company's products.
How do we act: we take shares now by 36,89 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company produces automotive oils and lubricants. Its revenue is formed from the following types of goods and services:
- Lubricants: motor oil, lubricant, transmission fluid and other.
- Antifreeze.
- Filters: oil and air filters for cars.
- Chemistry and other: brake fluid, fluid for power steering, different coatings and other.
- Franchisee payments.
Unfortunately, the company's annual report for the financial year 2021 is incomplete. Therefore, for information about the company's segments, we will have to focus on the Valvoline report for the financial year 2020. According to him, The company's revenue is divided into the following segments.
Maintenance Centers — 37,52%. In them, the company's customers can use the services of Valvoline specialists, who will use Valvoline products during service. Segment operating margin — 19,13% from its proceeds. According to the structure of sales, the revenue of the segment is divided as follows:
- Lubricants — 84%.
- Antifreeze — 1%.
- Filters — 8%.
- Chemistry and more — 2%.
- Franchisee payments — 5%.
The core of the company's business in North America — 40,16%. These are sales of Valvoline products, as well as other brands. Here the buyers of the company are auto-entusiasts, who change their own oil and so on. Segment operating margin — 21,37% from its proceeds. According to the structure of sales, the revenue of the segment is divided as follows:
- Lubricants — 87%.
- Antifreeze — 8%.
- Filters — 1%.
- Chemistry and more — 4%.
International sales — 22,32%. These are sales of the company's products to customers outside the United States and Canada.. Segment operating margin — 13,9% from its proceeds. According to the structure of sales, the revenue of the segment is divided as follows:
- Lubricants — 89%.
- Antifreeze — 5%.
- Filters — 1%.
- Chemistry and more — 5%.
Revenue by country and region:
- USA - 75,43%,
- Other countries — 24,57%.
Recently, the company considers the segments differently. In the presentation for fiscal 2021, they are presented as follows::
- Global Products — 60%. These are sales of the company's goods to auto parts stores and automakers.. Segment Adjusted EBITDA margin - 18,16% from its proceeds.
- Retail services — 40%. These are the service centers of Valvoline itself.. Segment Adjusted EBITDA margin - 31,83% from its proceeds.
Arguments in favor of the company
That same night. In the United States and the world, the mobility of the population is growing, which means, machines are operated mercilessly. Furthermore, Considering, that America is a country, in which it is impossible to live without a car, I think, that in the long run the company will be fine: the premise here is about the same, what in the case of AutoZone.
Price. P / S at the company 2,27, a P / E — 16,07. Its capitalization is approximately 6.67 billion dollars.. So it doesn't look particularly overrated..
Can buy. Considering all of the above, and the rise in machinery production in the U.S., I think, that the company may well be bought by some automobile manufacturer. Or even a private foundation or conglomerate — for example,, Buffett Berkshire Hathaway.
The latter option is very likely.: Valvoline is a stable and successful business with good growth indicators, just like Buffett loves. However, anyone can be a buyer of Valvoline. For example, buy a company can some major car dealer, who is tired of the low margins of his core business.
What can get in the way
Bad weather. The latest report showed a decrease in gross and operating margins: gross margin fell from 35.45 to 32,87%, and operating room from 20.09 to 17,1%. Final profit was not affected by non-core income. Logistical difficulties are to blame, increase in the cost of raw materials and labor of employees. Now the intensity of problems in these areas of industry as a whole is decreasing., but, maybe, they will still have a negative impact on the company's reporting in the next six months, maybe, and longer. And of course, it is always worth keeping in mind the possibility of a repeat of the quarantine of the spring 2020 sample: limiting the mobility of the population will hit the company's business.
Accounting. The company has a rather impressive amount of debts - a little more than $ 3 billion, of which 569 million must be repaid during the year. And the money at her disposal is not so much.: 230 million in accounts plus 496 million counterparty debts.
At the same time, the company pays 0,5 $ dividends per share per year are 1,35% per annum, — what it takes $ 91 million a year, about 21,66% from profits for the past 12 Months. Basically, the company has enough money for urgent debts, and for dividends. But in the future, payments can cut for the sake of closing debts or investing in business expansion..
Also, a relatively large amount of debts can scare off some investors on the eve of raising rates and rising prices of loans.. But I will note putting my hand on my heart., that in America, almost all companies are indebted at about the same level or much worse, so by this logic, it is impossible to invest in the American market - after all, "everyone has too much debt".
Fasten your seatbelts. Now Valvoline shares are trading at historical highs, so they could be shaken by the inevitable and unpredictable stock market turmoil..
What's the bottom line?
Take shares on 36,89 $. And then there are two ways:
- we wait, when the stock will exceed the historical maximum and will be worth 42,1 $. Think, that we will reach this level in the next 14 Months;
- hold shares 10 years, receiving dividends, the size of which, in theory, will grow with valvoline's business. But, probably, someone will buy the company during this time.
Well, you can look at the news section on the company's website., to have time to reset shares on the St. Petersburg Stock Exchange before, how the market will work out the information about the reduction of dividends. But, honestly, I doubt that, that cutting these payouts will lead to a sell-off in stocks: there is not such a large yield. And yet, let's keep this point in mind..
