DRVN - Driven Brands Holdings: Stay Objective And Focus On The Results

2023-06-05 16:48:53 ET

Summary

• I maintain a positive outlook on DRVN given the strong top-line performance, successful rebranding of car washes, and progress in integrating the U.S. glass repair business.
• The potential for DRVN to penetrate the national insurance business and management's confidence in their FY23 guidance are positive factors.
• The stock price has faced technical resistance at the $30 level, but I believe the market will recognize DRVN's value as it continues its strategic initiatives and achieves operational excellence.

Overview

I am still positive on Driven Brands Holdings ( DRVN ) despite the sharp downturn in share price recently – which I believe could be due to the change in CFO and reschedule of the anticipated investor day . The latter point, given the significance of the investor day, may have alarmed some shareholders who may have worried that company was hiding something. In my opinion, it is important to stay objective and evaluate DRVN based on its business performance. Strong top-line performance helped DRVN achieve an adjusted EBITDA of $127.8 million in the most recent quarter, and growth initiatives remained on track. The rebranding of DRVN car washes is still expected to be completed by the end of the year, which is very significant, and the results so far have been very promising. Additionally, the integration of its U.S. glass repair business is progressing well, and the move to penetrate the national insurance business is likely to happen soon, which I expect to expand DRVN revenue streams. Lastly, management also seems confident on its FY23 guidance as they reiterated their guide again on the 18th of May. Overall, I reiterate my buy rating for DRVN as I still see around 36% upside for the business if it can continue its mid-teen growth profile with margin expansion.

Car wash performance

The transition of all DRVN car washes to the Take 5 brand is still on track to be completed by the end of the year, with 65 percent of locations having made the switch as of the end of 1Q23. The most notable part of this is that management has acknowledged that rebranded stores are generating higher profits than the average for the chain, and that this trend is amplified in the top 11 markets where the company has a high concentration of stores. In my opinion, this tells us a lot about the effectiveness of the rebranding effort and the management's ability to carry out a massive project without negatively affecting the bottom line. I am becoming more confident that management will franchise the U.S. car wash business after seeing how successful this brand has been and that I expect it to be a complete success within the expected timeline. In their most recent earnings call, management mentioned that the rebranding exercise is one of the reason why they held back from franchising their US car wash business despite the fact that unit level economics support it. I believe the franchising strategy is a very positive one as it means the business can leverage the Take 5 Brand to expand while also supporting the company's asset-light business model and increasing profits.

Glass repair

The U.S. glass repair business is currently experiencing a period of significant change as it merges, combines, and gives a new brand identity to ten recent acquisitions (as per 1Q23 earnings call). Continuing integration, in my opinion, bodes well for future growth opportunities, and the implementation of a single operating model ought to boost the efficiency of already-established outlets. Consolidation and integration, in my opinion, will help streamline processes and create a unified brand. Achieving operational excellence and providing consistent, high-quality services across all DRVN locations should also be made easier through the standardization of processes, harmonization of practices, and implementation of a unified operating model.

It is worth mentioning that management highlighted the possibility of business partnerships with national insurance clients, which I think will open up additional revenue streams for DRVN. While the headline news is certainly positive, I would look for more data points before getting too excited about it.

Additional thoughts on share price and valuation

I think the big picture here is DRVN continues to perform as expected, albeit the stock price went in the other direction. There are a couple of reasons why I think the stock price has developed this way:

1. Change in CFO and rescheduling of investor day might have spooked some investors, as such there was a drop in confidence.
2. Technical price hurdle at the $30 zone is preventing shareholders from getting overly bullish as the stock dives below this threshold. To give context, DRVN had 2 secondary offerings made in Aug’21 at $29.50 and Sep’22 at $32.45. This means that there would be selling pressure once the stock goes past these levels.

I believe these are not major issues and as DRVN continues to successfully rebrand the business, roll out its franchise strategy, and penetrate into National Insurers, I don’t see why the market would permanently discount its valuation. That said, I do think that my valuation target of 22x earnings previously might be too ambitious as DRVN's leverage ratio continues to stay high. Until the leverage ratio inflects downwards, I am placing a larger discount to its historical average of mid-20s (from 2022 onwards as pre-2022 was low rates environment).

Conclusion

In conclusion, despite the recent decline in share price, I maintain a positive outlook on DRVN. The strong top-line performance, successful rebranding of car washes under the Take 5 brand, and progress in integrating the U.S. glass repair business are all encouraging factors. The company's move to penetrate the national insurance business is also expected to create additional revenue streams. The management's confidence in their FY23 guidance and the potential for mid-teen growth with margin expansion further support my positive stance. The stock price has faced technical resistance at the $30 level, but I believe as DRVN continues its strategic initiatives and achieves operational excellence, the market will recognize its value.

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