Valvoline (NYSE:VVV) shares trade at a lower valuation than the company's peers because it is a newer publicly traded entity, has an overhang from a dramatic increase in supply of shares coming to market from Ashland (NYSE:ASH) shareholders, and is saddled with a large underfunded pension that is actually inflating earnings. Valvoline was spun off from Ashland in September 2016. The company completed an initial public offering, but Ashland did not sell all its shares at that time. Instead, all shareholders of ASH as of the May 5 record data will receive 2.73 shares of VVV common stock. ASH will no longer own any VVV common stock directly.
Valvoline is the second largest US retail quick lube service chain by number of stores. VVV estimates that there are ~9,000 quick lube stores in the US. Jiffy Lube is the largest player with 1,900 stores. Valvoline Instant Oil Change (VIOC) ended FY16 with 1,066 stores (726 franchises on 15-year agreements and 342 company-owned stores). So VVV is in a strong position but it is certainly competitive. The corporate owned stores do slightly better than the franchise owned stores, performing 42 oil changes per day vs. 38 oil changes per day.
Valvoline has about $900 million in underfunded liability; however, due to return assumptions and discount rates, it is actually creating about 20 cents a share of pension income. Ben believes the management team should continue to be upfront about cash flow expectations as the pension income is not a cash flow. It is a relatively new management team which did not set this up to happen, so accepting and communicating the terms as they are will only help it in the future.
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