Valvoline is a “compelling” buy for investors ahead of a planned split, according to RBC Capital Markets. Analyst Steven Shemesh initiated coverage of Valvoline with an outperform rating, saying the oil change company is set to grow after it sells its global products division — which is expected to close in the next few weeks. “[We] think VVV will be a faster growing, higher margin business, with strong [free cash flow] generation,” Shemesh wrote in a Tuesday note. “We believe a 14x target multiple appropriately balances industry leading growth against separation risk/terminal growth concerns.” Over the medium term, RBC expects that sales growth in the mid-teens is achievable for Lexington, Kentucky-based Valvoline, as it grows the number of stores by 7 to 10%, according to the note. This, along with the $2.65 billion sale of its global products division to Aramco, should translate into modest multiple expansion. What’s more, Valvoline is “generally insulated” from challenges in the broader economy, as consumers will continue to need oil changes and other maintenance services for their cars regardless of whether there’s a recession, and its depth. The analyst expects Valvoline will have a “long runway of revenue growth and FCF” before greater electric vehicle adoption becomes an issue. According to RBC’s projections, electric vehicles may not reach a majority of cars on the road until 2045. “Bottom line – while accelerated EV adoption poses a risk to Valvoline, we think the risk lies further in the future than most would think,” Shemesh wrote. Valvoline has outperformed the broader market this year. It’s declined 12% while the S & P 500 has dropped 17% in 2022. Still, the analyst expects further upside from here. His $39 price target suggests shares can climb 19% from Monday’s closing price. —CNBC’s Michael Bloom contributed to this report.
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