Valvoline

Valvoline Inc receives a 5-star quantitative star rating, reflecting our opinion that this share class offers a compelling opportunity for investors. The stock currently trades at a 26% discount to our quantitative fair value estimate of $40.76 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The firm's balance sheet bolsters our estimated valuation. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. Reflecting the firm's leverage is its EBITDA/interest coverage ratio of 4.1, which lies in the bottom 30% compared with global peers. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. We believe this is a sign that shares could be cheap.

Conversely, the company's lack of profitability is potentially concerning. Companies with low profitability are often less resilient in recessions and are likely to generate weaker future cash flows for shareholders. The firm's enterprise value to free cash flow ratio of 31.4, a core component of profitability, sits in the top 40% globally. This suggests limited cash flow is available for reinvestment or return to shareholders, which, despite our favorable price/fair value ratio, is a negative attribute.

The company's narrow economic moat rating suggests it should be able to maintain robust profitability for a decade or longer before competition erodes its advantage. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.