Yet Another Value Podcast - Pershing Square Challenge 2024 winning team shares pitch on Valvoline $VVV

Episode Date: May 14, 2024

The team that won the Pershing Square Challenge, Garrett Wallis, Jared Duda and Joseph Montgomery Ferguson, joins the podcast to discuss their winning pitch on Valvoline Inc. (NYSE: VVV). You can find their winning pitch deck here: https://1drv.ms/b/c/b9a8675d1ef0d212/EUgO7sJJKoBBsx151i7xfvkBuTziYI94y8VF02bdym1WmA?e=21DQAc Chapters: [0:00] Introduction + Episode sponsor: Fundamental Edge [1:49] Backgrounds on team that won the Pershing Square Challenge [3:13] Valvoline Inc. $VVV pitch [8:57] Store density / DIY customer share [13:33] $VVV pitch cont'd [28:26] AutoZone comparison / Franchise model [35:35] Shift to EV, risks to $VVV? [39:13] Consumer behavior / why franchisee wants to work with $VVV [46:47] $VVV bear case / same store sales growth [57:10] $VVV - variant view that generates alpha Today's sponsor: Fundamental Edge You’ve probably heard about the Analyst Academy from Fundamental Edge by now. So instead of repeating the basics, let’s talk a minute about what the Academy is and is not. The Analyst Academy is a practical course on the tools and skillsets required to succeed in the buy-side analyst seat. The instructors have experience from firms such as Maverick Capital, DE Shaw, Citadel, Balyasny and ExodusPoint. But what is the Academy NOT? It’s NOT a course on stock-picking. It IS a rigorous guide to learning a process. It’s NOT a guide to pod shop investing. The Academy attracts a wide range of equity investors, from multi-managers to long only to family offices. Rather than teaching a particular style, Fundamental Edge equips learners with the essential skills required to hit the ground running and support their PM. It’s NOT a financial modeling course. Modeling is, of course, part of the curriculum and plays a central role. But the Academy is more than that. It teaches idea generation, thesis communication and how to add value as an analyst. To learn more and access a 10% discount code, go to fundamentedge.com/YAVP

You've probably heard about the Analyst Academy from Fundamental Edge by now. So instead of repeating the basics, let's talk a minute about what the Academy is and is not. The Analyst Academy is a practical course on the tools and skill sets required to succeed in the by-side analyst seat. The instructors have experienced from firms such as Maverick Capital, D. Shaw, and Citadel. But what is the Academy not? It is not a course on stock picking. It is a rigorous guide to learning and process. It is not a guide to pod shop investing.

The Academy attracts a wide range of equity investor. from multi-managers to long-goly to family offices. Rather than teaching a particular style, Fundamental Edge equips learners with the essential skills required to hit the ground running and support their PM. It is not a financial modeling course. Modeling is, of course, part of the curriculum, and plays a central role.

But the Academy is more than that. It teaches idea generation, thesis communication, and how to add value as an analyst. To learn more and access to 10% discount code, go to Fundamentedge.com slash webiafp, or just see the link in the show notes. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker.

If you like this pod, it would mean a lot of you could rate, subscribe, review, wherever you're watching, or listening to it. With me today, I'm happy to have, I'm going to let them introduce themselves in a second, but this is the team that won the Pershing Square Challenge. They're going to be pitching to kind of front run my intro. They're going to be pitching Valvelin, VV, is the ticker. They won the Pershing Square Challenge with this just a few weeks ago.

And I believe they have the deck that they won with, I'll include a link to it, in the show notes if you want to see that. So, guys, I'll let you introduce yourselves in a second. Just before we go there, I'll just remind everyone, nothing on this podcast is investing advice. This is my disclaimer. Please do your own research, consult a financial advisor.

I mean, these guys are first-year MBA students. If you're going to take advice from them, come on. You can't take advice from first-year MBA students. So, that out of the way, guys, first, congratulations. Why don't each of you just walk through, introduce yourselves, walk through a quick 20, 30-second background of who you are so listeners can know, and then we'll kind of start diving into the pitch. Yeah, for sure. Happy to start. My name is Jared Duda, first year MBA student at CBS. I'm from Pittsburgh, Pennsylvania originally, went to Oro Roberts University in Tulsa, Oklahoma for my undergraduate degree, and also did a master's at Vanderbilt before starting my career in by-side research. So, started my career at a long-only firm in Boston, and then was at Tiro Price for a little over two years before coming to CBS.

Garrett, do you want to go next? Yeah, thank you, Andrew, for having us. Garrett Wallace here from Houston. I went to Baylor, got my CPA, spent some time at PWC, and then worked in advisory, and then spent the last two years in private credit before starting at Columbia. And then this, I'll be interning it by a Serafm this summer.

Perfect. Joe, you want to finish this all? Yeah, I'm happy to. My name is Joe Ferguson. I graduated from Vanderbilt University with a degree in math and physics. And after Vanderbilt, I worked at Pied, as a consultant and they're banking in capital markets practice.

And I'm a first-year MBA student. And since I've, since I started at CBS, I've interned at a firm called Breezo Capital. And I'm going to be a Kane Anderson Redneck this summer. So I'm sure everybody's listening thinking, God, these guys just have such terrible backgrounds. You know, how could Andrew, does Andrew have any guess quality? Like these guys just, the scum of the earth. Maybe scum's not the right word. You guys hear what I'm saying.

But look, why don't we hop into the pitch, right? So I think because there's three of you, I think we'll do this a little differently. Why don't we start and you guys can just walk through the pitch for Valvaline and toss it back and forth amongst yourselves as you do the pitch? And then I'll come in at the end and kind of try to earn my bones as a host. I've got a host of questions because not only is Valvaline interesting, I know several people who are long Valvaline. They've got the corporate M&A history. But I also know there are several other kind of franchise driven brands that are loosely related to this. that I have a lot of people. So there's a lot of interest in this space. I've got a lot of

questions and I think it's really interesting. But I'll toss it to you guys. Why don't you start going through the pitch? Yeah, for sure. So I'm not sure what the exact price target would be now, depending. But whenever we pitched it, I think it's around the same ballpark. But we pitched Valvillian as along with a September 27 price target of around 84 bucks a share. And so that And so that, you know, is roughly 95% price upside and a 22% IRR. And we think that the risk rewards use favorably at just over three times at these levels. And the high level on Balbolein, you know, it's an operator and franchisor or vehicle service centers, primarily focused on quick lube and basic maintenance services.

They sold their global products business in 2023 to a Ramco. And now it's a pure play unit growth and comp growth type of story. So around half of their stores are franchised and the remainder are company owned. And, you know, looking back historically, Valvelin is a very different business today than it was for many years. Previously, it was a subsidiary of Ashland, where it really didn't receive the level of attention and focus that it deserved. And you can see management's recognition of this issue when they spun it out in 2017. team. However, products, the products division continued to divert management's attention until 2023 when that portion of the business was divested. So, you know, today, investors have this

unique opportunity to buy into a business that is not only performing extremely well, but has just really begun to benefit from the effects of a hyper-focused management team. So, you know, people want to know, like, how are you going to make money in this stock? And so we kind of three main thesis points. The first one being this is a new focus growth engine. So as a pure play, we believe management will have the capital and the focus really capture the white space that they see in front of them, as well as benefit from what we think are some secular tailwinds in industry that are going to drive same store sales.

And then the second thesis point really focused on terminal value. We think that EV euphoria is pretty overstated, and the terminal value is underappreciated in the stock. And then the third point being the cash flow generation and the ability this company has. to really be a compounding share cannibal. And so you add all that up, we think that really that drives a low 20s IRA over the next three years.

And double-clicking into that first thesis point around revenue growth, specifically a unit expansion. They have around 1,800 units today, and we strongly believe that management will be able to hit their goal of 3,500 plus. Not only is the addressful market of oil changes, large and highly fragmented, our research really points to a significant white space opportunity for new units. So what we essentially did was we scraped location data for Balbolein and the other

quick loop major players. And then we analyzed the cross section of that data with state vehicle registrations. And so leveraging that and then assuming the current peak market density across the board, we kind of sized our lower bound for unit TAM, which was around 9,200 total quick loops. And then on the other hand, if we assume that, you know, quick loop majors just dominate the Do It For Me oil change market, we size our upper bound, which is around 26,000 quick loop tan. And, you know, both of these figures, you know, far exceed the existing 5,000 units today, really underlining that, you know, opportunity for unit expansion. So I realize I said I'd come in at the end and I'd love to just pause here and ask one question

because I'm so excited. And this is one of the things that jumped out to me, right? So whoever was going to come next after that, but just on unit's hand, right? Yeah. The growth. This is a unit growth story, right? We'll talk multiples and everything in a second, but this is trading out of midteens multiple. It's a good business.

There's some franchise. There's some own. Like they generate lots of cash. I hear that. But you're really relying on earnings growth. And the way you're going to get earnings growth is this unit growth story. And I was just thinking, okay, I hear you. These guys, you know, it's not like they have 75% of the quick change space and any growth is going to be tooth in the else.

But at the same time, like, quick change has been around for 50, 70 years, right? Like, it's hard for me to imagine there's huge white space in the market. And this is not, this is not raising canes attacking the fried chicken market where there's, you know, there's rooms for different raising canes is fresh. ever frozen that's a little bit different than Popeyes. Like if I go to Balvaline versus a Jiffy Lou versus some other place, like it seems the same. So I understand that they haven't taken a ton of the market, but it feels like how many places are there really that are dying for one more quick change place? So yeah, I hear they can take it and they're probably taking some share for mom and pops, but it's not like they can go plant like 500 stores tomorrow and just, you know,

infinite white space. So how did you guys think about that? yeah i mean the store density point with that yeah absolutely so i mean we when we pulled this data and we looked at the state vehicle registrations we also looked at um population data from the census and we essentially drew like these 10 mile radius circles 10 mile radius circles around around each valvene and then we found uh we kind of summed them up and found an area where it was essentially the highest density valvelline location where there's like 21 valvallines in a 10 mile radius that area has about 1.1 million people on average but then if you look at like the least dense areas for valedine where there's only say two valvines in a 10 mile radius there's

0.8 million people on average that delta between like 1.1 million and 0.8 million is is not much it means that they're starting to land in areas, or rather they've already landed in areas that they're really ready to expand in and start fortressing. So I hear you there. And the benefit also is, it's also taking share story. So quick loop is 12% of the oil change market. DFIM as a whole is 56. And why you go to a quick loop versus a competitor, which will be like a regular auto body shop

or a dealership, is just time. I mean, the dealerships are trying to go to a more quick service model, but it requires now a drop off, take a loaner, and then come back, as opposed to people that just want to get the oil change in 20 minutes. I think that's why these guys are taking shared and they continue to take share from the dealerships. Is oil 20 minutes? I was sorry, I was just going to say, like, it also seems like you're handing on like the structural growth of traffic going forward for some of these boxes. And I think like the key secular trend that matters here is that DIY to the do it for me shift. And we're going to talk about this later whenever we talk about

the same sort of sales growth, but that divide tends to be drawn on income lines and people with higher household incomes are much more likely to outsource their basic car maintenance and just based on demographic data in which cohorts of the population are growing the fastest. You know, I think as Gen Z, millennials enter their higher earning years, you know, I think that's like a structural support store for that, for DFM to continue capturing share from DIY. And there's a runway to do so, given that DIY still has 40% of the market. market today. I'm quite surprised that DIY is 40% in market, but I am really surprised that do it for me, which is, you know, you go to your traditional auto shop and they take four hours

with your car. I cannot believe that is 56% in the market versus 12% at quick loop. I just don't understand it. How is it kept that big of a share? It's just not that there's not that many locations. And yet I think about who the competitors are, like if Jiffy Lub is the main big competitor, but it's a subsidiary of Shell. So we really focus on. on the fact that Valvaline has a pure focus now on a growth story. And then you like your only other pure play competitors, probably a take five or not, not, uh, sorry, Greece Monkey. Take five. You got like six other business units wrapped up in there within driven brands. Take five as a pure play oil change, but you know,

is Greece Monkey Express and like a lot of small like kind of tail end franchise concepts for that. But going back, like there really aren't a ton of scale, quick loop national franchise businesses like Valdeen. Yeah. Oh, go ahead, Joe. Yeah. And Valeline hasn't been doing roundups on the franchise side, you know, until maybe like the past two or three years.

So that story is also relatively new and has yet to fully mature, I suppose. And for them to start really leveraging the franchisee dynamic that they have to drive that unique growth is just starting to play out. So I guess if I came back to my question, my question was like, hey, you know, it's not like oil changes is new. Why doesn't everyone, why isn't the space already well taken over? And your argument, look, yes, there are lots of places, but as you said, quick change is only 10% of the market. So there's this huge, you should have ongoing trends.

I can't believe it's only 10%. You should have ongoing trends as both do it for me and especially the traditional go. And, you know, if it goes from 10 to 30% of the market, there's a lot of room and there's going to be a lot of space to put in a lot more valvilling stores, a lot more jiffy, like whatever it is. There's just going to be a lot more space. Is that kind of the answer? Yep, yep. Perfect. All right, thanks for letting me hop in. Please continue with the pitch. Sure. You know, so we discussed the white space opportunity and then, you know, that it's quite large, addressable market, highly fragmented. But we thought about, you know, what is the box that we're putting in this white space opportunity and how attractive are the unit economics?

And Valvaline truly benefits from attractive union economics. In reviewing the, the FDD, we looked back over the past five years, Valbalin, you know, over the highly inflationary environment, was still able to CAGR profitability at a rate faster than sales. Specifically, EBITO was K-G grant 9.8% and sales was K-Grant 8.6%, which is pretty impressive. And then we also estimated the unit economics going forward over a five-year forecast period for a single Valvallene. And over that period, we estimated a 23% unlevered IRR and a 45% levered IRA, which we also found pretty compelling. And then after thinking about the unit economics, we discussed this a little bit here, but we thought about the competitive, you know, whether Valvaline has a competitive advantage

to really seize that white space opportunity, capitalize it on it and, you know, move faster than their peers. And we think that they do. We think they have, you know, strong, you know, building blocks of a competitive advantage. First, Valvaline, you know, it's singularly focused. versus its peers which are either distracted, you know, they're subsidiaries, they have other concepts that they need to tend to, or they just lack access to public capital markets to fuel that expansion, like Greece Monkey, as we mentioned. And then second, you know, they've been investing heavily in their teams and technology in meaningful ways. They have a new head of real estate. They have a new CRM system to take advantage of the fleet opportunity. They have

model driven site selection that seems to work out quite well. on the research that we've done. And these are not just soft factors. They play out in the numbers. On a unit level, they're ahead of their peers on average in terms of AUV by 39%. Then in terms of car volume, they're ahead of their peers on average by 32%. And this, you know, we really see as operational excellence at Balvelin that their peers seem to lack. And then lastly, they have this really awesome franchisee dynamic where they have a number of large, highly capitalized franchisee partners that can obviously drive unit growth, but then they also have many smaller franchisee partners that still operate at scale to fuel unit expansion. I think the median store count

across their franchisees is about five, whereas for their competitors, it's about one. And so that's just a franchisee dynamic that none of their peers can really compete with. Yeah. So kind of going back to the top line now, you know, Vavilene has consistently posted high single digit to low double digit comp growth, you know, even before COVID. And, you know, I think high level, we believe that there are underlying traffic and ticket drivers that can help sustain this. And while pricing will roll over and they were obviously in inflation, you know, they benefited from that, you know, you know, there are still some structural kind of drivers are. Sorry, messed up. We can edit that out later um you know i i guess going you know back back to the traffic that we discussed

you know for traffic the key secular trend as we mentioned is the DIY to the do it for me shift and that DIY divide tends to be drawn in income lines as we mentioned you know people with higher household incomes are much more likely to outsource their basic car maintenance and you know based on demographic data and survey work we do believe that do it for me is poised to continue capturing share from DIY and it's plenty of runway to do so given that DIY why still has around 40% share of the market. And then again, it's Millennials and Gen Z and for their higher earning years and migrate to do it for me. They should support, you know, sustain 2% traffic contribution at least for Valvaline boxes going forward.

And then going now to Ticket and the drivers there, you know, so for ticket and mix, the first driver here is around non-oil change services and fleet services. And these are small but rapidly growing parts of the sales mix today that are highly accretive, to overall ticket. And the fleet business in particular is a focus of the new CEO. Serving these customers comes with 20% higher ticket on average and drives more store throughput.

And while still early innings, even just simple initiatives like building out a CRM system to understand and tap for this fragment in market, you know, I already showing some positive results year to date. I know that there was a little hiccup this quarter with it, but I think we're confident so far. We haven't talked to management yet about it, But I think a lot of these issues should be mitigated in the near term.

And then now going back to the other ticket drivers on premiumization. And so, you know, it's around as more vehicles in the car park require higher price synthetic oil, you know, it's kind of a natural uplift. It's a natural uplift for ticket. And, you know, there is a debate around whether or not the pricing benefits, you know, of shifting to synthetic oil would be offset by the theoretically longer oil change interval times that. that cumbersynthetic, but at this point, you know, oil change frequency is, is ingrained in consumer behavior and volumes really haven't been affected. Our primary research supported this view nearly unanimously, by the way. And motor oil still degrades over time. And if anything, I think people are more willing to get their oil changed more often, or at least on a normal

or on the historical schedule in order to maintain their more expensive vehicles. You know, and kind of in summary there, why we do expect store growth will drive the majority of future system sales growth, you know, I think that the key traffic and ticket drivers are still intact and are able to support that mid-to-high single-digit comp growth algorithm going forward. Thanks, Jared. I'll pick up on our second thesis point. So the second point's all about, you know, EV risk and how it affects the terminal value. And we really break down the EV risk and the two components. the first one being, what does the ice car park look like over the next decade or two? And then how can management address the EV car park?

So on the first point, as far as ice car park, we can look at forecasts and assumptions of what EV penetration looks like. We have the EIA saying it's 12% by 2050, and you have Toyota out there in the market saying, oh, EVs are going to cap out at 30% of market share. And so we took those two numbers and really kind of focused on Toyota's, like let's say just becomes the worst. It's 30% penetration by 2050. If you assume just a historical growth rate of the car park of the last decade, which is about 1% going forward, you know, at 2050, the ice car park will be about 5% below today's level, which is not that much, not too material, but it's also important to recognize not a straight line to that point. And when we do an analysis of the ice car park to that time using, you know, accelerating EV sales and normal scrap rates, the ice car park doesn't actually fall below. today's level until about the late 2030s. So we think we feel pretty safe with our with our

terminal value assumption, especially when you consider what those ice car parks imply as far as TAM. So you know, on a 30% penetration, we're looking at like a 16,000 quick loop TAM and we're currently at 5,000. So there's still way more room to run on that front. And we kind of, and it's important also to note that our thesis isn't focused on the market coming our way as far as EV risk. We kind of see EV sentiment as the Permabair, who's called 10 of the last three recessions, you know, he's going to be right at some point, but in the meantime, who's going to accrue the profit? So that's really how we look at it. And so flipping to the second part of that EV aspect, you know, we think right now

we're also seeing a little bit of rationalization around the EV euphoria. You know, that initial cohort of EV buyers is starting to mature. We're seeing really a full life cycle of the product. And people are starting to realize that there's more to EV cost of ownership than just the fuel cost savings. And so that high price tag and short useful life of the batteries has a real direct impact on the residual value of these vehicles, which we're seeing is driving higher financing costs, higher insurance costs, then lower than expected resale values. So, like, there's some real economic hurdles that need to be cleared here on this concept. And just to finish off that thought, you know, management recognizes what's coming as far as EVs.

And they're not waiting to be the last horse and buggy in town. And so what they recognize is the value of this business at the end of the day is not that they can do oil changes, it's that they have a network of conveniently located dense boxes with bays and technicians. And so how do you leverage that into the future to take advantage of the EV penetration and the EV proliferation? And you do that through making services applicable to EVs. And so management's already kind of piloted that program, trying to figure out what services EVs will still need. They still need tire rotation because the tires go out faster because they're heavier. You know, they do all the non-will change stuff like wiper blades, battery replacement and stuff

like that. So they're trying to get in front of that. And we also have the transition aspect of hybrids, which have continued to accelerate in sales really pacing or outpacing EVs. And those have the same oil chain servicing needs as fully battery EVs. And so managed to really take advantage of that. Brett Coffron, founder and lead trainer of Fundamental Edge, barely remembers his first year as a hedge fund analyst. Most of that year was spending a blind panic. Was his research any good? Was he learning fast enough? What did his PM really want from him? Creating on the by side was non-existent 15 years ago when Brett was a new analyst at Maverick. Then he actually got demoted.

Then he worked harder, found mentors, and asked for uncomfortable feedback. Eventually, he turned it around, learning by osmosis from the talented people around him, and rose to managing director. But is this the best way to develop talent? Brett doesn't think so, and that's why he founded Fundamental Edge. The Fundamental Edge Analyst Academy provides students with the tools, frameworks, and confidence to excel in any fundamental equity analyst seat in the industry. lose the panic and fast track your career on the buy side.

Find out more info about their next cohort at Fundamentedge.com slash you havep or just see a link in the show notes. I had some questions, but I'll wait because I think the valuation point will help with the questions. I was just going to say when you said people are starting to see the cost and the resale value, like go ask Hertz the rental car company who kind of went all in on Tesla cars in 2021 and people can pull up the Hertz stock and there's other stuff going on there. But they are ruined the day. They went all in on the electric vehicles. Did somebody want to wrap up?

I think we're getting towards, I'm just looking at the deck. I think we're about to hit valuation, and then I can come back with some of the questions. Yeah, I'll just hit the last thesis point real quick, and then we can roll in the valuation. So then the last thesis point is this is really high cash flow generation. So it's all about continued capital allocation and the discipline of that. Management's proven that they don't waste cash. They've returned as of this quarter all of the cash from the sale. And all the analysts are hitting them with when do buybacks come back?

And they've iterated, you know, once leverages in line, that they're going to start the buyback program again. And, you know, we're forecasting over the next, you know, three years through 2027 that they can buy back almost 20% of the outstanding, which is going to be a really great driver of returns and EPS growth going forward. Right. Yeah. Go ahead. Just to add on to that and like, I guess, state that essentially because of their commitment to returning cash shareholders and, you know, their role. robust economics, it really positions them to become another industry cannibal like AutoZone and O'Reilly, who have substantially grown net income while strategically repurchasing shares to fuel share price appreciation. And, you know, frankly, the precedent that they sent, set raises our level of confidence

that Valvaline will be able to do the same. And, you know, moreover, their compensation structure, management's compensation structure, with its shift back to EPS-based incentives going forward. forwards further supports these shareholders support of actions and so just tying all that back into valuation and kind of roughly you know again that September 2027 price target of around 83 84 bucks a share and so kind of the base case algorithm you know on 24 to 27 Kegers that that you know allows you to get there is roughly 10 percent store growth kind of seven to eight percent comp growth so it's 15 or 16 percent top

end growth, around 27% EBITDA margins with high 20s incremental. So we really don't underwrite a ton of margin expansion. And that kind of flows through, including the buybacks, kind of that mid-20s EPS growth algorithm. And so, you know, right now we're ahead of the street on all metrics and kind of near the high end of management's long-term stated algorithm. And, you know, kind of going back to that price target evaluation, I'm sure you have more questions on this, but we arrive at that using, you know, 21 times forward

P.E. multiple on our 28 EPS estimate. And so this translates to roughly 14 times forward EVE to EBITAM multiple on our capital structure assumptions. And again, as we mentioned, I think that the risk reward is attractive here just above three times, you know, based on these base case assumptions and then assuming nearly 30% downside in our bare case. And we didn't consider this point in our scenarios, but we do believe that this business offers significant optionality that, you know, proactive investor could take advantage of to increase returns. Not only could Valbulin re-franchise its corporate-owned stores, but it could also re-lever. Thanks to their conservative balance sheet today, their history of same store sales

growth, as well as their, you know, strong free cash flow conversion, we think that two turns of incremental leverage could yield $1.4 billion in incremental value, potentially in the form of a dividend recap. And I think that would take them from two times levered to four times levered if I'm looking at the numbers roughly. Yeah. Yeah. Yes. And if you think about like the leverage levels that other similarly like franchise concepts run at with similar free cash flow conversion, kind of in in the high 70s, low 80s, you know, I think that that you could easily take this thing up to three and a half four times. Yeah. A hundred percent. I mean, I don't have any off the top my head, but you know, most franchisees now these are, this is not fully franchisee. I don't think

they disclose the mix of franchise versus it's half and half. It's rough and half. But, you know, if you think of most franchisees, they run 15, they get 15 to 20 times multiples if they're running well, and most of them run, you know, five times leverage is about 33% of the

debt to equity stack there. It's not uncommon. Like, it's actually pretty common. If you're a franchisee's business, you should be reasonably low cyclicality, huge cash flows, exactly what you're saying. I would not be shocked to hear it. Anything else you want to do or should I help in some questions? Can you start questions?

Joe, I'm glad you mentioned the AutoZone comparison because people are going to hear this. And that's where my mind jumps to. You know, you've got a capital light car focus consumer business that's buying back shares with basically all their cash flow. And they've got a lot of white space. I hear that the two places I want asked. First, AutoZone from memory, like, you know, they're dealing with thousands of different parts. And because it's thousands of different parts, they had a natural advantage over mom and pops because you're buying, if you can buy a thousand parts over a thousand different. stores, you get better pricing than maybe one store, maybe deeper inventory. I don't see what the

advantage of like a corporate valvling versus your mom and pop because so much of the cost is going to be the box, just the real estate value, and then the labor, right? That's what's so much of the cost going to be. And then I guess I'll just throw my second thing in because it kind of hits on that. You know, the other places where franchisees really work, franchisees really work, especially in restaurants, right, where there's a lot of benefits. to national scale. Better advertising. You can do advertising over more. You get, you guys talked about kind of the fortressing of where you put multiple stores. You can get that. So there's some benefit there, but there's national advertising. And with restaurants, today, there's a lot of benefits

in having a consumer app. And if you're like a one unit franchise or a one unit store, you can't match the McDonald's benefit of this consumer app to say nothing of having like the touchscreens and everything. And I don't really get that with oil change. Like, I don't know how much an oil change consumer app is going to drive things. I don't understand the benefits of like a national scare franchisee. Why Joe, Joe, Garrett, Jared, when we start our own oil change, like, why are we writing a check for royalties to valvling every day instead of just having the, I'm trying to think gage, instead of just having the G-A-JJ auto change.

Like, what's the benefit there? So I threw a ton out, however you guys want to take that, I'll let you take it. Sure, yeah. I mean, I think that, you know, in terms of having a really dense network of stores, it does save in terms of the marketing expense that's able to be spread across more units. Valvaline is also very far ahead, I think, against their competitors in terms of collecting data on their customers. And they use that to essentially improve their staffing at the locations.

And so they're able to get some labor leverage when volume goes up and they're able to staff appropriately when they expect volume to do so or when it's down. So this is important. But, you know, we've spoken with franchisees in the past, and they talk about, you know, how do they do better than, say, you know, your mom and pop shop down the road or whatever, whatever one we're about to create, you know, it's because they go in there and they're able to adjust the pricing effectively. They are able to manage the accounts better.

Frankly, they say that some of the mom and pops out there are just not really very well-run businesses in the Valvaline super pro management system, which is a turnkey system, that they've just spread out across, you know, all of their franchisees. Whenever they have an update, it goes out pretty effectively. That really does drive the operational excellence that we see in the unit outperformance, not only versus mom and pops, which we expect there to be, you know, to be massive. It's still, you know, it's still well beyond, you know, driven, you know, Greece Monkey and the other competitors as well. In terms of that, that. in terms of that car volume coming through each store.

And I'll just touch on this, you know, last point here. You mentioned complexity, you know, for AutoZone. There's a lot of different skews. I think people think about a Valvaline unit as just providing oil changes. And, of course, that is the primary product. 74% of the revenue comes from oil changes. But they have, I think, on average, and this is from our data scraping exercise, on average, they have maybe 12 or more different non-oil change services.

and products essentially at their locations. So the box is a little bit more complex than one might think, and they're still able to drive throughput despite that. And they're actually looking to make it even a little bit more complex as they try to tackle the EV problem, as they try to roll out battery replacements and more complex inventory-intensive services that you just don't have, you know, at these mom-and-pop operators.

or they don't they're not run as effectively through them and i think like who and i think like who's better position to win on that front like in the eve transition and you know the capex required to you know purchase you know more expensive machinery to to provide these services or things like that or you know having the bandwidth to train all these employees and upskill them you know it's going to be the big franchise concepts that have established systems and i think going back to like the super pro pro system too on the labor front you know it's much you it's much easier to plug and play, you know, kind of this lower skill, for lack of a better phrase, higher churn labor. It's easier to plug that into like an already established like franchise

corporate design system, I think, than that happen to deal with that more transitory nature, you know, if you're running a mom and pop store. And this kind of also dovetails into a question you got to your Twitter post. What was that was you sign up to a Valvling or for that case, even a Jifilube or to others because of the relationship they have with the product provider. So when the divester happened from the products business, they struck a deal for the oil that's on a dollar margin basis, so not even a percentage margin, it's a dollar margin basis. So as a franchisee's of Vivaling, you have access to what I would consider probably a less

volatile product stream as far as the cost, which would benefit you as compared to maybe like a grease monkey or take five, or you don't have that kind of direct access. And just quick question, is there, if I'm with Vivaling, like obviously they've got, you know, hundreds of stores, does, can they turn, can they do an oil change faster than, you know, obviously they do it faster than me because it would take me five days and a hundred YouTube videos. But if we were running a mom and pop, like does Valveline just the training, maybe a little bit of, I don't know if AI is the right word, but does the training in the in force practice, can they do an oil change in like seven minutes where it takes a mom and pop

12 minutes or something? I don't think it's the actual change of the oil difference. I mean, they have it set up to be changed very quickly. That's what they do when you come in the bay. I think the real difference is that when you go to a quick loop sole provider versus a multi-care provider, it's the line and it's what's in front of you. So if the guy in front of you is getting like nine other things done, it doesn't matter how fast they can do your oil change. And what Valvolene is like it's really focused on oil changes,

which is I think why you see that they can do like 52 cars a day. And then the average for the competitors is more like in the 40s. And like Jippy Loop has a much broader multi-care. model where they're not just doing like tire rotations. They're doing break replacements and things that take much more time. So it's not even a question just the old change time. It's a question of what else is just being done in front of you. Perfect. Let me go to, I want to come to value soon, but let me go to the other thing. Because the thing that jumped out to me, you guys addressed it well. It's going to jump out to everyone is the risk, you know, if we were in Elon Musk's dream

world and three years from now, everybody's doing electric robo vehicles, you know, the risk from the shift to electric vehicles. And you guys address it well, but I just want to come at it from a different A, right? So I was just doing some Googling and I studied the refiners a lot so you have similar risk here. I was just doing some Googling. Last year, about seven and a half percent of the car sold in the U.S. were EV and then another seven and a half percent were hybrids. And of the car stock, you know, the overall amount of cars in the U.S., only about one percent are electric. So I hear what you guys are saying, but if I just think about EV, I mean, it might drop this year because I think consumers are a little

less than franchise. But if I just thought about for the next 10 years, all EVs sales are going to be 7.5% to 10% with the hybrids, whatever, that's going to eventually take a lot of cars out. And you guys were talking about the cars flipping in late 2030, but

if I thought about the math I just laid out, like to me, the I stock is actually dropping 1% per year over the next 10 years if I'm just kind of doing that rough math in my head correctly. So I just want to talk talk a little bit more about the EV risk and like why is the math I'm doing there silly versus I did that math on two Googles in five minutes. I know you guys spent a lot more

time. Why is my math wrong? Well, because you you also have to account for the actual car park growth. So if you look at 2010 to 2022, car park growth is about 1% per year. And one of the main points that we were kind of poking on around the shift to DIY to Deepem is that if you break down what we call like the driving age for this argument it's like 15 to 70 um the growth going forward over the next two decades is really driven by who is currently 15 and 30 today and so that's where that generation right now is much larger than its predecessor and so the next two decades we're going to kegger the car park the car driving age at twice the rate as we did in the prior decade and so when i when i take a one percent historical rate going forward at

I think I'm probably being actually a little conservative. I think car park would grow more than that. But you also need to account. So I think our numbers were we start 15% EV sales going forward and we just crank that up until it's like 40, which gets us 30% penetration in the back end. And when you have normal scrap rates and the car park growing at 1%, the ice car park will still continue to grow because it's not a one-for-one replacement. And there is, there is EV scrap and stuff like that because EVs have been on the road for,

I mean, at least a decade. and the EVs we're talking about here is the 7.5% EVs. It's the fully battery. So the way we ran the math, it was not a 1% decline starting today. Do hybrids need oil changes at the same level as this traditional car?

Yeah. If you look at the state of oil changes, it's like 12.5,000 miles, which is what technically a premium car should be, or premium lubrication should be. And the number just bears out that no one is following that. That was an interesting thing because

one of the things, again, maybe because I was having a refiner focus. You know, I kind of thought, okay, like cars in the 70s had 12 to 15 miles per gallon or whatever. And today the average car has, ignoring hybrids, 25 to 30 is kind of standardish. You know, people can hit with the math, but direction correct. And I was kind of thinking, hey, is there some risk where, you know, when I got my car in college, I remember, it was like, hey, every 3,000 miles, go get your oil changed. And then our oil is and loos better today, where it could be 10,000. And I think what you guys are saying, yes, but the consumer behavior around 3,000 is so ingrained that they're doing that. I want you to build on that.

And then I would just throw out, do you think it's because I remember like right in my windshield, they would put the guy when I was leaving, he'd put, hey, here's the reminder for your next oil change. It would be a little sticker. Like, you know, if I was at 3,000, 6,000 come in. Do you think it's a little bit like the valvillings and everyone can nudge everyone because they, you know, never ask your barber if you needed a haircut. When you leave, they say, here's when your next oil changes and everybody's just kind of a slave to that. So I'll, again, threw a lot out you. I love to ramble. I'll let you guys address some of those.

I can start it off and then Jared DeGam finish it up. I think the risk reward for not changing it is just so terrible. So I can spend $100 this month or I can spend $3,000 to get my engine fixed. And when you look at the FDs from a Valvalene and you look at what

percentage of the services premium loo versus the conventional premium has gone up materially in the last three years while visits has also increased. So you're not seeing the change there. We've talked to operators. They're like, it's 5,000. When you take miles driven in the U.S. and then you back out what average miles are per car and how many defam oil changes there are, it gets you to the

same 5,000 mile numbers. So any way you look at it, we're not, there hasn't really been a shift in consumer behavior. And then the big automakers are already walking back there. Yeah. We'll change interval recommendations. Yeah, kind of adding to that, you know, Garrett touched on a lot of the main points there. But yeah, again, like you have consumer behavior is entrenched. And again, if you're spending, you know, $35,000 for like a base model vehicle today, it's like you're almost willing to spend more, you know, on that preventative maintenance aspect in order to preserve the value of your investment, especially since, you know, average age of cars in the car park is increasing. People are holding their, yeah, I think there was an

article in the Wall Street Journal even this week talking about how people, like the math for new cars just doesn't make sense and people are keeping their cars longer and longer. I think, again, there's more of a focus on preventative maintenance. And to your point, I think there is definitely that psychological nudge, you know, from the valve leads and the jiffy loops that kind of get your oil change for frequently. If you think about it, it's not just the bavillings you incentivize. I mean, even the car manufacturers, even if they're saying, hey, you can change it. They're incentivized too because where do most of the oil changes places?

They probably happen at like an auto dealer attached shop. So they're kind of incentivized. Everyone's incentivized to keep the nudges and keep people coming in. And so it is incentives from a warranty perspective or anything like that. Yeah. Yeah. Cool. Let's go to, let's, I just want to ask on franchisee. We talked about why a franchisee would want to get associated with them.

You get a better oil deal. You get some branding. I mean, there is, there is some fortressing to the franchise. Like I remember New Orleans where I'm from, the Pelicans. All the sports teams are sponsored by the local, you know, like a Jiffy Loub or a Balbulin or something. So it's silly, but that is a sponsorship and that is advertising that you're not going to get at mom and pop. So there is some of that. I just want to franchisees economics.

You mentioned that the average franchisee here owns about five units. That's starting to broach from like the four of us pool or money together or mom and pop owns it. It's starting to get more into like professional private equity of franchisee. You know, obviously private equity, much smaller private equity, but it's starting to get into that area. the past 18 months have not been super kind to them in terms of just interest rates going up. How do you guys view the health of the franchisee system here? Because if I can just keep around, that is one thing. Like I'll hear people toss a franchise war out and they'll be like, oh, it trades it eight times.

I mean, my first thing will be like, yes, it does, but their same store sales are negative and all their franchisees are going bankrupt. So, you know, eight times is going to 800 times really quickly. How do you look at the health of the franchisee base here? Yeah. Yeah. So, go ahead. And I was just talking about, like, you know, I think a strength of Valvaline is that they have, you know, more of an institutionalized franchisee-based. You know, it's better capitalized.

It's, you know, drawing that comparison to restaurants again, I think for a lot of these unit growth and comp growth type of stories, what the company has the most control over is a unit growth. And we already talked about the unit economics are attractive for these boxes. But, you know, and really what's going to drive system growth? The majority of that's going to be unit growth. And I think some of that is de-risk more when you have a network of smaller or a fewer but better capitalized, more institutional-grade franchisees as opposed to relying, you know, on your mom and pops. And, you know, I think about it like for restaurants, you know, typically unit growth or

not typically, but a lot of times that the store growth in kind of foreign countries was where there's one or two master franchisees partners is also almost more de-risk than what it is if you're dealing with a, you know, a network of long-tail mom and pops and, you know, on the domestic side. Yeah. And to thank, thanks, Eric. Just to add to that, you know, Valbaline does, of course, benefit from that incremental marketing. They, you know, they're able to leverage some of the data from corporate.

But they also leverage a, you know, a model that helps. them drive site selection. So the franchisees work together with corporate. And it does seem that this model is better than the ones that the competitors have. And I think that this does contribute to the franchisee health. So we did like a sampling across like 500 different locations across the concepts. And Valmaline benefits from like an incremental hundred bips of population growth that the competitors don't have. And I think, you know, I think, yeah, that's just incrementally beneficial. So that branch is e-health. And to your point on just health and then rates, because we got this question in the actual competition as well, is that the unit economics are so strong that you really have a lot of headroom if you were to lever up this business or run it levered.

So when we talk about 20% unlevered IRAs, it's like that's assuming a six times exit. If you just look at ROICs in the in the out five-year maturity window, it's really high 20s RICs on the investment on an unlevered basis. which is really interesting. And then for the franchisee aspect of it, we actually spoke to an operator that has a, I think around a triple digit network of stores, and they are trying to add more stores

as quickly as they can. It is such a good business, and the Unicomics are so strong. They are adding stores as fast as they can, so I don't have too much concern on that side. And then as far as how rates tie into this and the unit growth story is when you look at where these boxes go

and the competition for that land on the corner next to Costco or wherever you went next to something else, it's going to be the box. It has the best unit economics. And so when rates come up and there's the competition for those areas of land get more tough, it's not another crumble that goes in that box. It's who has the highest and best use for that land. And with, you know, 25, 28% ROICs, I think Balvelin has a really strong, has a strong bid to acquire those new properties. You mentioned the re-franchise angle, which is one of the angles I like. And it doesn't, you know, it's the Pershing Square Challenge. I think Ackman is the judge here.

And one of Ackman's earlier campaigns was going at McDonald's and telling them to re-franchise their store and doing a very similar math to what you guys said. And I wonder if he, this would check a lot of his boxes. And I wonder if he was taking notes like, oh, let me, I have two more questions and then we'll wrap up. You guys have, people can see, I think you said you're going to make the slides available. slide 16 you've got your bear case before I start diving into more bear case

I just want to ask what is in your bear case that you guys laid out not the numbers but the thought process behind it if that makes sense Jared you're going to take that and like follow up anything you want to go ahead I'm going to pull up the model actually yeah so the bear case I think the real risk here like the unit growth story makes sense there's white space they have cash flow they don't need debt to go out there and get it

so if they want to grow like they can grow they just brought in a new development team that has the capacity for 100 company on stores and then the rest being pushed off in the franchisees. I think the risk here is really the same store sales storing. I mean, imagine calling for high single digit same store sales

and we're modeling 8% same store sales, which is funny, as we practice this and we pitch this everywhere, no one asked us about that. That was just people just accepted that number. No, no, no. Someone, that was my last question. So someone was going to ask you about that.

Don't you put that evil on me, Ricky, Bobby. So I think that's truly the risk And I think we lay out a good story For why it's not crazy I mean there is a pricing power element here As prices go up just in base level oil effects Like the prices are sticky They go up and they stay up

We have a good traffic shift Coming in from millennials and Gen Zs Just earning more money And that's who's you know 60% apparently 60% of Gen Z's Changed their own oil Which is shocking And then you have the NOCR

And you have the fleet Which they're kind of going after And so that all can build up to that, you know, six to eight percent same store sales growth. But if times really do get hard and the consumer really does get constrained, you know, is it, is that really reasonable? Does that kind of come down to that two to three range where you're really just kind of taking price and getting a little bit of mixed shift? And I think that's, I remember correctly, Jerry, that's kind of what is driving our same store sales. We're bringing that same store sales down to the low single business range. Yeah, it kind of in that number is like the actual comp number for a downside case.

You know, it is kind of assuming that this thing comps in line with kind of lower growth, you know, with lower growth. Did we lose Jared? Can you guys hear me or did? I think so. Just a little bit. Yeah. We lost Jared. Okay. Yeah, Jared. You went on mute. Let me ask my question. And Jerry can hop in if you. Yeah, I hear you. Yeah. Go ahead, Jared. No, no, no. It's just basically, you know, that. That downside case for the comps assumes kind of that, that, you know, comps are in line with inflation. And then you have that negative reflexive impact of when the unit economics aren't as good store growth will probably start to slow going forward.

And, you know, it kind of gets you down to that, you know, but you're still going to have potentially an assist from the buyback or capital allocation there. Or I want to check that comment, actually. But again, just kind of that 30% downside, I think, is reasonable. So on the growth here, right? Like, you guys, your. model is roughly 15% annualized growth going forward.

And of that, let's call it 60, we can split it just to make the math easy. Half of it is unit growth going forward. And half of it is, as you said, same store sales growth. And in the same store sales growth, there's the premiumization, which I actually kind of believe. Then there's pricing and there's traffic growth. And of that growth, it's kind of split a third, a third, a third. And I guess my two questions would be, number one, traffic growth, because the limit here

seems to be, we talked a lot about putting more, you know, when we were talking about the franchisees, you guys were saying, hey, they can get 52 cars through per day versus mom and pops are kind of in the mid-40s. I wonder if they can really do traffic growth. Like, aren't you eventually limited just by kind of the box size and the your employees' time? Like, can they really keep growing traffic for two to three percent per year? Because if I said roughly, they're doing 10% more turns per day than their competitors? Like, look, if you had 20 bays versus your competitors at four, of course you can. But I just wonder if they're running into just the limits of human time and how quickly you can get these done.

Yeah. So I think on the traffic point and you saw it in the last earnings call, it has to do with the utilization of the bays. And they really talked about going forward doing a modular design to their buildings because the third bay doesn't really get utilized until closer to year four or five. And so I think that might be a way to kind of address the comment you made that going past 52, can they, really do it. But just on top of that, I don't think 52 is the end-all be-all for this because a lot of what we're also talking about on traffic is going to come from hopefully the proliferation of fleet services that is done not during quote-unquote office hours. So running more cars through when it's kind of closed up to the public and that really drives higher ROAs for the current

asset base. Like all the best investors, Fundamental Edge believes that the learning process never truly ends. That's why the Analyst Academy is just the beginning of their journey with you. Fundamental Edge alumni gained access to exclusive content such as the guest speaker series, which recently featured Rich Falk Wallace of Arcana, who discussed the role factors of factors in fundamental investing. Alumni can also look forward to frequent webinars, case studies, and content from industry partners. Fundamental Edge recently hosted its first analyst spring training conference in Scottsdale, Arizona. Attendees enjoyed a range of speakers, judges' socks competition, and network with fellow alumni. Mark your calendars for the

spring of 2025 for the next conference. Visit Fundamentedge.com slash gafp or just see a link in the show notes for more information about the next Academy cohort. Well, that relates way to well to my next point, pricing, right? Because my two pushbacks on pricing would be, like, they did over the past two years almost 5% pricing. And my two pushbacks on pricing would be, A, like the past two years, you had lots of inflation. So I think they were getting 5%.

And you guys are not modeling 5% going forward. You're modeling more 2% to 3%. But I would think like this seems like something that gives back a little bit of pricing if wage inflation and energy inflation come down. That's just my gut. You know, it gets competed away a little bit. And then B, if you're going premonization and you're doing fleet deals and the fleet deals, you know, they're bringing their fleet and you've got someone working it overnight or in the morning because you're just leveraging it. Like that is great for your ROAs. But I would think your pricing is going to have to come down because a fleet is going to go to every shop in the area and say, hey, we're going to, you know, this is incremental to.

you. This is great. You're utilizing your things during off hours, but we can go to everyone and we'll go to whoever's the cheapest. So is it pricing going to come down as you get more fleets going? Well, you know, so far management has said that that fleet comes with that 20% higher tick. And we obviously don't assume kind of that level going forward. And we do recognize that pricing is definitely going to roll over. Like it's going to moderate. Like you're going to have people probably be more aggressive on promotions again as other competitors at building boxes like that pricing is not going to be there forever but historically you know when oil prices have had been flowed you know they they haven't given all that pricing back over time like there is an

element of pricing power to this business just given you know going back to those building blocks of competitive advantage that that we talked about previously so um you know again like we don't assume the same level of pricing going forward and um you know but but again like they're not going to give all of it back. And if it's helpful, I mean, in the latest earnings call, they talked about how they just started to look into data associated with, you know, individual customers and their, you know, socioeconomic backgrounds, like the low-income individuals based on their, you know, data analysis have not started to pull back despite high inflation. So they're still returning at the same

cadence and they're not losing customers, which I think means, you know, that they do have a little bit more pricing power than one might initially expect. And then the just final point of the pricing power for fleet, I think there is a lot of value for these larger national fleet customers in partnering with a national fleet servicer. And there's only what, and you say you go shop it around, there's really only one other player in the market. And that's Jiffy Lube that has the same scale. And we've talked to their operators. and they're not going after this space. The quote is, you know, nice to have it,

haven't gone after it because it's not a focus of corporate and so it's not being pushed to the franchisee base, which is based, they're all franchisee. And what you have here is a large corporate 50-50 that has put a CRM system in place and is going after that and it's going to come to the benefit of themselves as well as the franchisees. They are 50-50 corporate franchisee.

Do you think they're like, I don't see a lot of things that settle at 50-50, you generally either go, you know, Chipotle, Starbucks, all company-owned. And they would say, hey, we're better company-owned because we can protect the brand and four standards. Or you go the other way and you go wing stop, all franchisee, right? It strikes me as a little strange that they're 50-50. And you were just kind of saying, hey, that's good because with a lot of corporate, they're

a little bit more focused. They can think a little bit about going after fleet, but you know, you still get the franchisee model. I would guess, do you guys think they have to like kind of pick a path and go one way or the other. Like, you guys have obviously argued for upside if they went all franchisee. But do you think the status quo can hold here with the 50-50? I think our base case models a slight increase in the franchise mix of the store base. So, you know, over our forecast period, you know, I think today, and Garrett and Joe,

feel free to hop in. But I think today, like, the unity economics of these stores are still really good. I think if those degraded, maybe more over time, like maybe it's better. maybe the unit economics, you know, being a franchisee is better. Maybe that changes over time. But I think today, the unit economics are still so compelling that you almost want to own some of that, you know, if you're Valval Incorporate. You know, Wingstop, they're always, we're all franchisees and it's great. The stock trades at 200,000 times price of earnings. But you do wonder, hey, if the franchise economics are so, so good, like, shouldn't you want to capture some of that?

Yeah, I hear you. Like, if you're getting 20% unlibered IRs from opening up boxes, why not just go do it yourself and capture it? Okay, last question, I think the one thing that people are going to say here is they're going to look at this and they're going to say, okay, we mentioned the AutoZone comp. Everybody wants the AutoZone comp. These guys pitch a great story, unit growth, like all this sort of stuff. This trades at 15 times EBITDA, 27 times price to earnings. I'm just using this year's guidance, right? And I think people are going to have a little bit of sticker.

shock where they're going to say, okay, these guys have a great pitch, but it is all priced in, right? Fifteen times EBITDA is where you start getting when you've got a very good company. So I just want to ask, you know, you pitch this because you guys think the IRR here is, you know, way over 20% for the next three years. When people look at it and say, hey, this is a full multiple, you know, what do you think your variant view is that kind of generates alpha here? And I'll let each of you talk if you want or whoever wants to handle that. Yeah. I think maybe just high level in valuation, you know, obviously this was hotly debated, you know, on our side internally. And, you know, I think, I think, I think first off, it's important to

know that we don't have like a big, like a long track record for what this thing has traded at, like in its current business form. Again, it was only in 2023 when they spent off the global products business. So we don't have like a like a multiple cycles worth of history on, you know, on the relative valuation that this thing has gotten. So, you know, I think that's important. And then, you know, it's lumped in a lot of time. with automotive services and automotive retail and, you know, we at high level don't think that that is like the right business model to compare it to. I think like we have business model peers that we tried to benchmark it against, like including franchise concepts like Hilton and Planet

Fitness and restaurant brands international. And then again, since they do have a higher mix a company-owned stores, throwing Starbucks into that mix. And NAP-on, I believe, has like half their business has some franchise component as well. So we just tried to think about it more, you know, with a broader perspective, you know, in terms of valuation. And then thinking about the multiples that those business model peers get versus kind of the algorithms that they imply. And Valvlin has, you know, much faster, even the growth and comp and unit growth and EPS

growth algorithm than a lot of these concepts. So going back to the valuation, I think if anything, 14 times EV to EBITO, which is what we assume in 2027, is almost conservative just given the algorithm that you're paying for today. So I think going back to your question in terms of what's driving a lot of this, I think it's just underappreciation of the durability of the EPS growth algorithm going forward. Yeah. I think just to fall into that, I think you have to separate what the multiple you're looking at is and what the underlying fundamentals are going forward. And so I think you look at the underlying fundamentals first, and you can see, you know, a mid-20s EPS Kager for five years, you know, 40% free cash flow per share Kager for five years for

years. And then you take a look at, okay, I'm paying, let's call it. I think it's about 25 times depending on what your forward number is. It's like, that actually doesn't seem that unreasonable if I'm going to be able to Kager EPS for the next five years at that rate. And then the question really becomes, okay, what's the back-in growth rate and what's the multiple I want to exit at? So if we assume to get to a market return, let's call it 10% in this investment, it's a 15 times P.E. in 2027. And so if I, but if we assume it's 20 times the exit or 21 times, you know, we're probably to get to market return, you probably got to play closer to what 30 times today. And so a second one we backed into our exit valuation with Jared was that

take a 12% discount rate, assume the next five years after our discrete growth rate, and then I think it's got three and a half times terminal value gets you to our exit price of $84, which I think, you know, a stage 2, 7% growth seems pretty reasonable. given there's still going to be about 15 to 20 percent store count growth left in it and you're still going to have the top line some form of same store sales growth and you're throwing off so much cash you don't even know what to do with it and you're buying back shares I think you can easily back into 7% EPS growth going forward. Let me just ask Joe the question a slightly different way.

So the market thinks 15 times even thought this is a good business. Where do you think your view versus the market is most divergent? If I just put the math away, do you think it's, hey, the market is a little more skeptical on the unit count? Do you think it's the market's a little more skeptical on the sustainability as all the ice things we came in? Like, where do you just think your view is the most divergent from the market? I mean, it certainly is a combination of, I think, what Jared mentioned around maybe thinking that, you know, management guidance is a little too optimistic and this growth algorithm is not quite as durable. But, you know, whenever we've spoken with investors about this name and their reluctance to get into it, it really comes down to that. that EV risk. And we kind of parallel path to it. We've covered it a lot on this on this call,

you know, on this, this episode. But, you know, we really think that, you know, it's a bit of an illusion and that it's long dated. And that's something that is difficult to, you know, to convince others of. It's an unfalsifiable risk. But we really do feel as if, as Garrett mentioned earlier on, this, you know, their asset is their density of, of base and, and their technical that will allow them to transition over to providing EV services and essentially take on that opportunity when the EV car park starts to be, you know, at scale, essentially. That makes, it makes total sense to me that the ice hang up, because as I walked you through the math, that was that and just saying, hey, I'm paying 15 times EBITDA.

And, you know, I've started to have it beating out of my head, but there is still the old value investor in me that says, hey, you know, you want to buy stuff for 10 times price earnings. Like that's the metric and it's tough to get them. We did try to triangulate all this with like a DCF based approach and as Garrett talked about a little bit. But again, like even if you just assume that unlever free cash flow grows kind of inflation plus and assume their current cost of capital, you're able to back into like a 15 and a half times implied forward EV to EBIT or the multiple today.

This was, guys, this was great. I think we're going to have to wrap it up here. But I just want to say, A, this was great. There's going to be a link to the deck in the show notes so people can see that. that on page 22 of the deck it includes all of these guys emails so not to put your emails out publicly but if anybody wants to reach out to them their emails are there so you can follow up with them unfortunately if you're looking for interns not only do all of these guys have internships lined up i think it's jared who has two internships lined up so you're not going to

be able to wrap these guys up but uh look this was great congrats again and uh you know hopefully looking forward to having all of you on in the future we'll uh we'll keep this conversation going but congrats again guys and we'll talk soon thank you for having us Thanks. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.