Wells Fargo Recommends Buying Underperforming Auto Repair Stock with Potential 20% Jump
Wells Fargo has identified an opportunity for investors in Valvoline, an automotive repair stock that has recently experienced a sell-off. Analyst David Lantz, who initiated coverage of Valvoline with an overweight rating, believes the stock has significant upside potential. Lantz has set a price target of $42, implying a 24.5% increase from Wednesday's closing price. He highlights Valvoline as a high-quality operator with leading comparisons, accelerating unit growth, and an asset-light business model.
Reasons for Opportunity
Despite the long-term risk presented by electric vehicles, Lantz sees the recent underperformance of Valvoline as a sharp decline that creates an attractive entry point for investors. He believes the company is poised for accelerated unit growth, improved margins, and enhanced free cash flow following the sale of its global products business to Aramco. Additionally, Valvoline's majority franchised and non-discretionary nature provides a combination of offensive and defensive qualities.
Unwarranted Sell-Off and Attractive Valuation
Valvoline's stock has underperformed since late July, primarily due to concerns surrounding the franchise pipeline and CEO succession. However, Lantz views these reasons as seemingly unwarranted, further strengthening the case for investment. He notes that Valvoline's shares trade 13% above auto service providers but remain below auto part peers, high-growth retailers, and restaurants. Lantz describes the company's long-term targets as attractive and achievable, with potential for growth through improved efficiency in car service, expanded services beyond oil changes, and sticky pricing.
Addressing Electric Vehicle Risk
While acknowledging the risk posed by the rise of electric vehicles, Lantz believes Valvoline is better positioned than others in the industry. He emphasizes that the risk is further out than some may anticipate, providing a favorable outlook for the company's performance.
In 2023, Valvoline's stock has underperformed the broader market, with a modest year-to-date increase of just over 3%. However, Wells Fargo's recommendation highlights the significant potential for growth and an attractive valuation. Investors may find this underperforming auto repair stock an enticing opportunity to consider.
Conclusion: Potential Impact on New Businesses
The case of Valvoline presents a compelling narrative for new businesses in the automotive industry and beyond.
Opportunity Amid Underperformance
David Lantz's analysis underscores the importance of identifying opportunities in underperforming stocks. For new businesses, this could mean reevaluating their investment strategies and considering stocks that, despite recent sell-offs, have strong fundamentals and potential for significant growth.
Addressing Industry Shifts
The rise of electric vehicles presents a long-term risk for companies like Valvoline. However, Lantz's perspective suggests that businesses can strategically position themselves to mitigate these risks. New businesses, in particular, must stay abreast of industry trends and adapt their strategies accordingly to ensure their long-term viability.
Valuation and Long-term Targets
Lantz's assessment of Valvoline's valuation and long-term targets offers valuable insights for new businesses. It emphasizes the importance of setting achievable targets and striving for improved efficiency and expanded services. Moreover, it highlights the importance of maintaining an attractive valuation, which can enhance investor interest and support business growth.
In conclusion, the analysis of Valvoline's stock provides a valuable lesson for new businesses: opportunities often lie in unexpected places. By staying informed, adapting to industry trends, and maintaining attractive valuations, new businesses can navigate market challenges and position themselves for success.
.svg)
