DRVN - Emeth Value Capital - Driven Brands Holdings: Mr. Market's Irrationality Already In Full Onset

2024-02-11 06:00:00 ET

Summary

• Driven Brands is the largest automotive services platform in North America.
• Driven Brands receives preference from insurance carriers and fleet operators who wish to work with nationally scaled and recognized chains.
• On August 2nd 2023, Driven Brands' share price fell more than forty percent in a single day.
• A base case scenario modeled indicates a value of $39.89 per share, or approximately 179 percent upside to intrinsic value based on the year end share price of $14.26.

The following segment was excerpted from this fund letter.

Driven Brands Holdings Inc. ( DRVN )

Overview

Driven Brands is the largest automotive services platform in North America with more than five thousand corporate owned and franchised store locations operating across quick serve oil change, maintenance and repair, collision, paint, auto glass, auto parts distribution, and car wash. The group serves more than seventy million vehicles annually and owns several of the most recognized brands in the industry, including Meineke, Take 5 Oil Change, Maaco, and Carstar.

Over the past decade, Driven Brands has expanded its location count by more than threefold, grown its system-wide sales by more than sixfold, and increased profits by nearly fifteenfold. The group is majority owned by Roark Capital, a leading private equity investor in franchise business models, and has been led by Jonathan Fitzpatrick, CEO, since 2012. Fitzpatrick personally owns more than $30 million of Driven Brands common stock and the vast majority of his and his management team's compensation is tethered to generating long-term shareholder value.

Industry Overview

The automotive care industry in the United States is large, growing, and highly fragmented. In aggregate, the total addressable market is estimated to be $350+ billion and encompasses a wide range of services, including automotive repair and maintenance, heavy collision repair, paint, auto glass, and car wash. There is a steadily growing car parc of 285 million vehicles in the U.S., which travel in excess of three trillion miles annually, and the automotive care industry plays a role in keeping this essential transportation infrastructure operating.

The industry has proven to be recession-resistant and has a long track record of consistent growth, having grown at four percent per annum since 2007. In addition, several structural tailwinds will continue to drive predictable long-term industry growth. The number of vehicles in operation, average vehicle age, and vehicle complexity are all increasing, which in turn drives growth in demand for vehicle maintenance and cost of repair. Moreover, the continued shift in consumer preference toward do-it- for-me (DIFM) versus do-it-yourself (DIY) has increased the market for professional services.

With respect to the competitive landscape, the automotive care industry in effectively every sub-segment remains highly fragmented. For instance, roughly eighty percent of auto service locations are comprised of smaller chains and independent shops, which provides scaled multi-site operators ('MSOS') significant whitespace for organic and inorganic growth. This bodes well for Driven Brands, as it has the ability to invest in the required technology, infrastructure, and equipment to service more complex cars, and receives preference from insurance carriers and fleet operators who wish to work with nationally scaled and recognized chains....

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