Driven Brands Stock: On Good Path To Consolidate The Market (DRVN)

Overview

I feel Driven Manufacturers (NASDAQ:DRVN) is just marginally undervalued with 13{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} upside. The automotive treatment field in the US is big and fragmented, and Driven Manufacturers is positioned to advantage from the escalating complexity and age of autos, which qualified prospects to larger fix expenditures and a change towards do-it-for-me [DIFM] service companies.

Business enterprise description

Driven Brands Holdings Inc. is a enterprise that gives solutions for autos. Services offered by the business consist of automobile overall body fix, windshield substitute, windshield restore, oil adjustments, servicing, and vehicle washes. Driven Models Holdings serves people today in the United States.

Significant and fragmented market

The really dispersed aftermarket automotive treatment industry in the United States materials car or truck homeowners with critical needs-centered providers, as well as substitution factors, components, and tools, very long soon after the preliminary sale of a car or truck. Around 250 million cars are deemed motor vehicles in functions [VIO] in the US, and this amount is steadily soaring (the ordinary age of these automobiles is 12 several years).

The DRVN VIO emphasis for servicing and repairs is the substantial inhabitants of vehicles that are 6 decades previous or older and hence no extended lined by manufacturers’ warranties. I think you will find going to be an increasing variety of more mature autos, and they are heading to need continual routine maintenance. Given that most people have a day by day will need for cars, I anticipate the industry to proceed encountering extended-phrase progress tendencies that are steady and predictable.

In my view, the industry’s long-phrase expansion is secure and predictable many thanks to a number of secular tailwinds. The main just one is the average age of vehicles in use will enhance, so much too will the demand for servicing and repairs for those people automobiles. Owing to the escalating complexity of modern cars, maintenance costs are increasing and a lot more people today are turning to DIFM assistance vendors who have the important experience, assets, and tools to full the get the job done for them. The premiumization of some products, these kinds of as a lot more high priced motor oils to preserve efficiency, and the increase in the ordinary repair purchase are both success of these developments.

A rising range of vehicles and a shift in shopper preferences toward [DIFM] are equally good for the car clean business, but it also benefits from the fact that its providers are low-cost and persons use them often. Since August 2020, Pushed Manufacturers has been a aspect of the automated vehicle clean field, which constitutes a sizable part of the complete U.S. vehicle wash marketplace (70{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} in accordance to DRVN S-1).

Motor vehicles are obtaining far more and a lot more elaborate these times, which raises ordinary repair buy

As manufacturers strive to set them selves aside from one particular another technologically, specifically in parts like safety attributes and engine improvements, vehicle styles have come to be significantly intricate in the latest yrs.

Sophisticated Driver Aid Units [ADAS] are an excellent illustration of this basic principle due to the fact they employ a number of sensing modalities and electronics to completely automate numerous safety attributes. Enhanced road protection is motivating both of those automakers and people to adopt ADAS at a rapid rate. The complexity of ADAS necessitates pro DIFM companies, as properly as calibration processes to assure ideal performance. As such, substantial, nicely-resourced chains are greatest suited to offer ADAS sensor calibration due to the fact of the specialized expertise and equipment they can pay for to invest in.

Fortuitously, this pattern has led to bigger regular fix fees in the collision fix sector. Also, carmakers are adding new engine technologies to new cars. To maintain up with the calls for of these slicing-edge engines, the oil modify sector as a complete has experienced to premiumize its choices in order to contend. The premiumization of goods and the rising complexity of vehicles are primary customers to commit far more funds throughout each individual service go to.

DRVN deliver a broad selection of services and is a really acknowledged manufacturer

In my viewpoint, DRVN is the only organization-degree automotive companies system that delivers its customers with a total selection of selections. Its diversified platform allows it to provide a large assortment of providers for all tends to make and versions of autos, as nicely as in a range of diverse fields. A lot more importantly, the vast majority of companies are requirements that customers need to have irrespective of the state of the economic system, and DRVN delivers a wide selection of pricing selections to accommodate their budgetary requirements. To superior provide its shoppers, DRVN has a worldwide community of a lot more than 4,000 offices, every single of which supplies a exceptional established of solutions. The ease of staying ready to acquire care of all of a business’ automotive provider needs in a single location is a significant offering point for the “one particular-quit-store” design.

In addition, the S-1 states that DRVN is the most diversified automotive services platform in North The us, and that for in excess of 350 decades, its manufacturers have offered high-quality products and services to retail and industrial prospects all above the planet. A big number of people seem to be to be supporters of DRVN for the reason that of the firm’s well-known brand names, the determination of its franchisees, and the realistic rates and excellent benefit of its items and services. Franchises like Maaco and Meineke, which present vehicle repairs, have been about considering that 1972 and have turn out to be residence names.

Over 250 qualified functions experts back again these makes by providing trainings to franchisees, firm-operated, and independently-operated destinations to assist them provide clients with company that is unmatched in the industry. To satisfy the demands of the two retail and commercial customers, DRVN has built considerable investments in teaching, operations, and marketing, which I think has held their brand names competitive in an at any time-evolving marketplace.

Eye-catching franchise design

The franchise product is a person of my favourite elements of DRVN. Monetarily, I think the DRVN small business product is a hybrid of franchises, unbiased organizations, and organization-owned enterprises. With a large proportion of their models remaining franchised and independently operated, as very well as the significant-progress and significant-margin characteristics of our organization-operated units, Pushed Brands enjoys dependable resources of money circulation. DRVN’s brand names enjoys solid purchaser loyalty, and as a consequence, DRVN’s merchants consistently see an raise in exact-retail outlet sales when making interesting funds-on-cash returns.

Because of to its asset-mild small business model and geographical and support class diversification, Driven Brand names has persistently created superior operating margins and steady money stream irrespective of economic ailments. With an typical of over 10 several years less than their belts, DRVN’s varied foundation of about a thousand franchisees are greatly invested in their enterprises, their personnel, and their consumers.

Unbiased operators exterior of North The united states operate DRVN auto washes and are paid a share of earnings. What’s more, both equally DRVN’s domestic automobile wash enterprise and its corporation-operated retailers have good unit economics.

Total, Driven Brands’ combine of franchised and high-advancement company-operated retailers bodes well for the company’s means to sustain high running margins, swift expansion, and reputable funds flow era above the extensive phrase.

Forecast

According to my expense thesis, I hope DRVN to expand as planned in FY22, achieving $2 billion in revenue and $200 million in earnings. Provided the earlier mentioned-pointed out potent secular trend, I feel DRVN can continue to grow even in this weak macro setting. DRVN must also be ready to keep its guided margin. I believe that DRVN can retain its sector share. In general, I foresee $2.5 billion in profits and $254 million in earnings for DRVN in FY24.

If DRVN does this and trades at the similar forward earnings multiple as it does now, it should really be value $33.42 in FY23. This is about 13{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} bigger than the present share cost, implying that it is only slightly undervalued.

Critical threats

Not an straightforward sector with numerous opponents

Level of competition is fierce in the automobile sections aftermarket. In my viewpoint, the sector is highly competitive simply because of the extensive range of enterprises competing for customers’ awareness. In addition, some rivals have merged formerly different automotive company makes and retailers to boost performance and acquire gain of economies of scale.

Good quality assurance is not effortless to control as DRVN scales more substantial

The wellness of DRVN is tied to that of its franchisees. Workers of franchisees are not DRVN employees. Though DRVN does its greatest to enable its franchisees be successful, it simply cannot assurance that their stores will normally run smoothly.

Conclusion

DRVN is a little undervalued based on my model. The organization serves people in the United States and operates in the really dispersed aftermarket automotive care industry. The marketplace is expected to carry on enduring extended-expression growth due to the raising quantity of more mature cars and trucks and the change in buyer choices in direction of “do-it-for-me” provider companies.