Undervalued Valvoline Offers an Opportunity

Zain Akbari: Trading at a roughly 15% discount to our $24.50 valuation, we believe that narrow-moat Valvoline offers investors an opportunity to capitalize as it leverages its strong product brand into growth internationally and in its instant oil change offering. With vehicles increasingly requiring synthetic lubricants, branded premium motor oil companies like Valvoline should benefit as customers are pushed into higher-margin products that are more conducive to the differentiation that underpins brand-based competitive advantages. As vehicles service lives extend, the advantages of using higher-quality motor oil are growing, particularly as the cost of a premium oil change is far lower than the consequences imposed by lubricant quality-related engine wear.

The dynamic extends globally, and Valvoline's expanding international footprint should help generate growth as it leverages its research and development outlays as well as its reputation to further penetrate newer markets, particularly in emerging economies. We also have a favorable view of the firm's growing instant oil change offering, which should benefit as vehicle complexity leads motorists to having their cars and trucks serviced by a professional. We expect that the fragmented quick lube industry should slowly consolidate behind large players, and believe that Valvoline, which has the second-largest U.S. network behind Jiffy Lube, can use its product brand halo to gain share.

At current levels, we believe Valvoline's shares offer investors an attractive entry point in a company with strong brands that benefits from durable tailwinds.