Buy this auto services stock as worries of higher oil prices are overblown, says Stifel
Valvoline , an automotive maintenance services firm, could see its shares rise if oil prices move higher due to the U.S.-Iran war, according to Stifel. The investment firm upgraded the stock to buy from hold. It raised the stock’s price target to $42 from $40, implying 28% upside from Friday’s close. Oil prices have jumped this month due to the Iran War, with U.S. West Texas Intermediate crude futures for May delivery trading up around 40% over the past month. However, Valvoline is unlikely to feel the impact of those increases over the near term as less than 20% of its operating costs are linked to oil-derived lubricants used to service its customers’ cars, Stifel said in a note to clients. “Concerns about oil-driven margin compression are overblown,” analyst Chris O’Cull said Sunday in the note. “The recent pullback provides a compelling entry point, with market concerns regarding base oil inflation and gasoline prices appearing to be largely discounted.” Finished lubricants, including motor oil, account for just 12% to 14% of Valvoline’s total operating costs, according to Stifel. And those costs are unlikely to balloon over the next few weeks, largely due to the fact that base oil is less volatile than crude oil, analysts noted. Base oil accounts for roughly three-quarters of motor oil’s composition, per the Tribology Lubrication Technology Society of America. “Short-term spikes typically don’t flow through to base oil, and a prolonged increase would likely take 3–4 months to impact VVV’s P & L, providing good visibility for implementing proactive pricing,” O’Cull said. The analyst added that the company boasts two critical structural offsets to potential headwinds: “a direct revenue hedge through floating pricing for its 50% franchised network and rising waste-oil recovery revenue, which typically tracks crude prices.” Stifel’s call falls in line with consensus on Wall Street. Of the 17 analysts covering the stock, 12 have a buy or strong buy rating on MongoDB, LSEG data shows. Valvoline shares have risen nearly 13% this year, outpacing the S & P 500 — which has declined about 5% in that time.
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