Description

Overview

Driven Brands is the largest automotive services platform in the United States. The group has more than 5,000 locations across several auto verticals including quick lube oil change, collision, maintenance/repair, paint, auto glass, and car wash. The company came public in early 2021 at a $3.5 billion market cap ($4.8 billion EV) with $300 million in run rate EBITDA. After falling ~40% in a single day following Q2 earnings, Driven now trades at a $2.1 billion valuation ($4.7 billion EV), with $530 million in run rate EBITDA.  I believe the current headwinds in car wash and auto glass are temporary, and that the market is dramatically underappreciating the quality of their largest asset, Take 5 Oil Change.

MATURE BRANDS

Collision, Maintenance/Repair, and Paint

Driven’s collision, maintenance/repair, and paint brands include Carstar, Meineke, Fix Auto, Abra, and Maaco. These systems are entirely franchised, and as the mothership, Driven Brands earns a 3-7% revenue royalty on each unit’s sales. There are 2,200 locations across these brands which, through a combination of steady unit and SSS growth, throw off predictable growing streams of royalty cash flows for driven brands. 

Meineke

Meineke was founded in 1972 and offers an extensive set of total car care services to retail and fleet customers. This includes maintenance, repair, and replacement of components , such as brakes, heating and cooling systems, exhaust, and tires. There are currently 790 Meineke locations across the US and Canada which has remained relatively stable over the past decade. Over the same time SSS have grown by approximately 5% per annum. For any franchise system, franchisee economics rule the day, and on that front Meinke gets an A+. According to the 2023 franchise disclosure document, the average cost to open a new Meineke is ~$400k and 4-wall EBITDA is in excess of $200K for an average location. 

Meinke produces ~$30 million in annual royalties for Driven Brands, which has been growing in the low single digits. 

Carstar, Abra, Fix Auto

Carstar, Abra, and Fix Auto were founded in 1989, 1984, and 1997, respectively, and together comprise the largest franchised collision repair network in North America. Today, this includes ~1,000 heavy-collision shops that have been growing unit count low single digits, and SSS in the mid single digits. Carstar accounts for ~750 of Driven’s total collision shops, or about 75%. The collision repair market in the US and Canada is estimated to be ~$41 billion across ~35k shops, and independent or small MSOs still represent >60% of all collision shops. However, large national MSOs like Caliber, Gerber, and Carstar have been rapidly gaining share over the past decade as insurers favor these networks that have standardized processes, better technology uptake, more efficient operations, and offer a single point of contact. Their scale allows these networks to negotiate performance linked direct repair programs (DRP/PBA) which are highly favored by the largest insurance carriers. The result is that an average location from a large MSO network has ~13 DRPs, while an average collision shop has only 3-4 DRPs.Over the past decade, the largest MSOs have increased their market share of insurance DRP work from ~10% to >40%. 

While the franchise disclosure documents don’t have summary financials, we can see that each of Driven’s heavy-collision brands have revenue per location profiles that are ~2x better than an average collision shop (est. industry average is $1.2m). Driven also indicates that Carstar franchise cash on cash returns are 50%+. 

These collision brands produce ~$70 million in annual royalties for Driven Brands, which has been growing in the mid single digits.

Maaco

Maaco was founded in 1972 and offers an extensive suite of paint services and cosmetic repairs. Maaco primarily serves retail customers and commercial fleet operators and provides services at a much lower price point than most collision centers, making it an economical option for minor auto body repair when customers prefer not to file a claim. Today, there are ~415 Maaco locations across the US and Canada, which has been declining slightly in recent years, but has been offset by SSS increases. According to the 2023 franchise disclosure document, the average cost to open a Maaco is ~$600k and 4-wall EBITDA is in excess of $200K for an average location. 

Maaco produces ~$30 million in annual royalties for Driven Brands. 

Auto Parts Distribution & Other

1-800 Radiator 

1-800 Radiator was founded in 2001 and distributes a broad range of long-tail automotive parts, including radiators, air conditioning components, and exhaust products. 1-800 Radiator serves 100,000+ auto shops and is highly regarded for its high in-stock rates and its ability to deliver parts to customers within hours. There are currently ~200 1-800 Radiator locations, which are 99% franchised and have been stable in unit count with SSS increasing mid to high single digits over the past decade. According to the 2023 franchise disclosure document, the average cost to open a new 1-800 Radiator Warehouse is ~$800k and 4-wall EBITDA is in excess of $200K for an average location.

1-800 Radiator produces $35 million in annual royalties for Driven Brands. 

PH Auto Glass

PH Auto Glass was founded in 1967 and distributes windshields and glass accessories through a network of 22 distribution centers across Canada to more than 8,000 end customers. PH Auto Glass is corporate owned, and generates approximately $50 million in annual sales. 

Automotive Training Institute

ATI was founded in 1980 and is a leading provider of training services to maintenance/repair, and collision shops. ATI is corporate owned, and generates approximately $20 million in annual sales. In addition to recurring profits, ATI’s customer database of over 130,000 automotive shops provides Driven Brands with a pipeline for future franchise development and acquisitions. 

Car Wash

IMO Car Wash

IMO Car Wash was founded in 1965 and has ~700 express-style conveyor car washes across Europe and Australia. These locations are 100% corporate owned and produce ~$200 million in revenue annually. All IMO locations operate under an independent operator model where a third-party is responsible for site-level labor and receives commissions based on a percentage of site revenue. This results in consistent, high-margin revenue. IMO store level expenses have consistently run at ~55% of revenue, which has yielded ~$90 million in annual store level contribution margin for Driven’s international car wash platform. I believe this translates to $40-$50 million of annual free cash flow after IMO corporate costs and maintenance capex. 

GROWTH BRANDS

Oil Change

Take 5 Oil Change

Take 5 Oil Change is Driven Brands’ marquee asset, and is arguably worth more than Driven’s entire enterprise value today. The business was founded in 1984 and operates in the stay-in-your-car, quick serve oil change market. In the United States, there are approximately 450 million oil changes annually that happen in the DIFM segment, and the quick serve model accounts for ~100 million of those oil changes and has rapidly been gaining share. Driven acquired Take 5 Oil Change in 2016 when there were only ~50 units and today that has scaled to nearly ~1,000 locations. These have been primarily corporate owned locations so they punch above their weight versus some of the other verticals at Driven that are highly franchised. I believe Driven is opening new corporate Take 5 Oil Change locations at between 40% and 100%+ cash on cash returns. 

Per the 2023 FDD, an average Take 5 Oil Change location does ~$1.35 million in revenue and has 4-wall EBITDA margins of 27%, or $365k in store level EBITDA. The average investment to open a location is $1.1 million, so an approximate 30% cash on cash return. This is highly attractive given Take 5’s history of msd+ same store sales growth. For corporate locations, add back the 7% royalty and another 4% of incremental franchisee operating expenses to get to 38% EBITDA margins, or ~$510k in corporate store level EBITDA. For a leased corporate store, where the average cost is also $1.1 million, the cash on cash return is 46%. However, Driven will often purchase the real estate for a location outright and then sale and leaseback ~90% of the capital back out. In these instances, the occupancy costs might be $30-$40k higher per year, but the total net capital invested is only $150-$200k, resulting in incredibly high cash on cash returns. Today, there are approximately 650 corporate owned Take 5 locations, and Driven plans to build ~70 new locations per year over the next 3 years. 

On the franchise side, Driven really only started franchising Take 5 three years ago, and the uptake has been incredibly strong. They expect to end 2023 with 350 franchised units, of which 280 units will be less than three years old. In addition, there is a pipeline of 750+ franchisee openings that will secure several years of very strong growth. Under their standard area development agreements, a Take 5 franchisee signs an agreement to develop, and pays all the franchisee fees upfront, for an average of 9 stores in a territory over a 4-5 year period. This pipeline of 750+ stores is simply the existing area development agreements in place, providing upside as new development agreements are signed. Notably, because there is both natural sales ramp to unit openings (shown above), as well as a royalty percentage that increases from 3.5% in year 1 to 7.0% in year 3 and beyond, the current royalty revenue from Take 5 is de minimis. I estimate ~$15-$20 million today. However, as the franchisee store base matures, and as the pipeline is built out (expect ~120 franchise unit openings per year over next three years), I expect that Take 5 Oil Change alone could be hitting a run rate of $90-$100 million in annual royalties in five years time, still growing in the mid-high teens at that point. 

Taking the franchisee and corporate side together, Take 5 Oil Change today produces ~$285m in EBITDA for Driven Brands, which is expected to grow to ~$480m in EBITDA by 2026. Thirty percent of this growth, or an incremental $60m in EBITDA, is simply from the maturation of ~400 locations that are less than three years old. Thus, in a little over three years time, Driven Brands would trade at <10x EV/EBITDA from the Take 5 Oil Change business alone. I expect that in 5 years time, you could be easily approaching ~$600m in EBITDA. In addition, this EBITDA converts to free cash flow at a high rate. An increasing proportion of EBITDA is coming from franchise royalties which require no capex, and as a simple ~1,500sqft box with concrete floors, garage doors, and almost no equipment of any kind, the maintenance capex needs for corporate owned locations is very low. Valvoline guides to maintenance capex of 1.5% of unit sales, or ~$30k per unit. Take 5’s historical spend is less than this number. Even if you assume $50k per unit in maintenance capex, it is still <10% of EBITDA. In terms of TAM, Valvoline is at ~1,800 locations today, is opening ~150 new locations per year, and has a goal of reaching a total network size of 3,500+ units in time. At this point, Take 5 is about half the network size as Valvoline and is opening 30% more units per year, resulting in a growth rate in store count that is 2x greater. Hard to know where the ceiling is here, but if Take 5 and Valvoline each reach 3,000 units, they would collectively be around 75m oil changes annually which would be about 16% of the total DIFM oil change market. At this point, 40% of oil changes are still happening at a dealership, and another 35% of oil changes are still happening at generic auto repair shops or tire shops, where you either have to drop your car off or wait in a lobby you don’t want to be in. If you look at Valvoline/Take 5 new customers by source, the biggest share donor is from these two sources. 

A topic that inevitably comes up when talking about Take 5 / Valvoline, is the transition to electric vehicles. On a surface glance, many investors simply turn the page on Driven on worries that EVs make quick serve oil change a dying business. I believe that is wrong for several reasons. There are ~285m vehicles on the road right now in the US which has been growing in line with population growth for some time. BEVs as a percentage of new car sales in 2022 was 6%. However this figure is very geographically diverse. For instance, it was 17% in California, 3% in Texas, and only 1% in Louisiana. If you model BEVs as a percentage of new car sales reaching 40-50% in a decades time, BEVs will only be 10-12% of total VIO, and on an absolute basis there would still be ~270m ICEs on the road, or only a 5% decline over the ten year period. And as mentioned above, this will be very geographically diverse. If the car parc in aggregate is 10-12% BEV, then many states, including those where Take 5 has its largest concentration of company owned stores, will still be in the mid single digit penetration of BEVs. (see graphic below, Take 5 corporate stores are concentrated in low EV adoption states). Thus, in these states ICEs on the road might actually be higher, not lower, in ten years time. To add to this, cars don’t typically come to Take 5 or Valvoline until they are > 5 years old when the warranty or pre-sold maintenance packages that are bundled with new car sales roll off. They are going to a dealer for oil changes. So in terms of impact on oil change revenue, the dealers will be the first tranche to take a hit, and the impact to Take 5 and Valvoline will be 3-5 years lagged to where the car parc is broadly. As a result, I think you could easily see 12-15 years of growth before EV related declines begin to occur. 

For those interested in playing with the EV adoption data, I’ve found this dashboard to be really helpful. (https://www.autosinnovate.org/resources/electric-vehicle-sales-dashboard)

Auto Glass

Auto Glass Now

Driven Brands entered the auto glass market in 2019 when they purchased Clairus Group for $213m. Clairus owned PH Auto Glass (discussed previously), a B2B glass distribution business, as well as ~230 retail glass locations that were highly franchised and operated under several banners including Uniglass, VitroPlus, and Go! Glass. In 2022, Driven began its push into the US auto glass market. In the span of 9 months, Driven spent $400m acquiring 12 different auto glass brands in the US, totaling ~170 auto glass locations. Incredibly, before Driven began its consolidation effort, Safelite was ~30x larger than the second biggest auto glass competitor in the US. Driven is consolidating all it’s US glass assets under the Auto Glass Now brand, and they are now firmly the #2 player with an expected 270 locations by year end (~1/10th the size of Safeliete in terms of revenue). Thus far, Driven has opened ~70 greenfield / brownfield AGN locations and the returns are highly attractive.  There is a large pool of auto repair shops that AGN is able to refit / repurpose for its needs in a very cost effective manner. They have guided to $150-$200k of capex per new unit, which they expect to ramp to $1m of sales per unit (roughly where they are now on existing units), and ~25% 4-wall EBITDA margins. Looking forward, there is also a unique structural tailwind in the auto glass market. Most new cars these days have advanced driver assistance systems (ADAS). For these vehicles, you not only need to replace a windshield when it cracks, you also need to recalibrate the ADAS given that there are sensors and cameras in the front of the car. This more than doubles the ticket. Today, only ~20% of AGN and Safelite repairs have calibration attached, which will naturally trend higher as the car parc rolls to newer vehicles. This alone can drive 2-4% SSS growth. In addition, because of the average ticket increasing substantially, this will push many jobs past the deductible limit of most consumers making the insurance portion of the business essential. This will favor scaled players. At this point, AGN’s business skews heavily toward retail and commercial customers (non-insurance). However, Driven already has strong relationships with most of the top insurance carriers through its collision brands, and it has plans to expand its auto glass insurance business. As some may be aware, while Safelite is the dominant auto glass retailer in the US, it also functions as the third party administrator (TPA) for a majority of the largest auto insurers for glass only claims. For instance, a customer of GEICO that calls into a 1-800 number to file a glass claim, actually is routed to a Safelite call center where they process the claim. There have been countless reports from independent glass shops over the years of Safelite systematically “steering” customers away from competitors and to their safelite shops. While exact figures are not available, it is estimated that Safelite processes 75% of all insurance glass claims. There is only one other TPA of scale, LYNX, and Safelite Solutions is multiples the size. AGN has the opportunity to introduce itself as one of the only TPA alternatives to Safelite. Critically, beyond the existing relationship with insurers, Driven has already been functioning as a TPA for insurance carriers in its Canadian auto glass business since 2005, so it already has a running start at both the know-how, and technology. Safelite is a $20 billion business (https://www.cdr-inc.com/news/press-release/cdr-fund-x-sells-belron-stake-transaction-values-belron-21-billion) and I believe Driven is doing all the right things to build a highly valuable and scaled business in their auto glass vertical. I estimate that AGN is at a $50-$80 million run rate of EBITDA which is expected to grow substantially over time. AGN plans to pause new builds for the next several quarters while it completes its integration of the acquired assets, after which time it will open ~70 new locations per year. 

Car Wash

Take 5 Car Wash

Driven Brands owns more than 1,100 car washes, making it the largest car wash company in the world, and the second largest car wash company in the US. (IMO discussed previously is ~700 units in Europe and Australia). In aggregate, they have spent more than $2 billion acquiring and building new car wash locations. In the US, since 2020, they acquired ~360 car washes and have built ~60 greenfield locations. The acquired units were split across 40+ bands, and in 2022 they began the process of converting all acquired units to a singular Take 5 Car Wash brand. Today, 85% of all US units have been converted. I believe in time this will prove to be a very smart move. However, as of today, the Take 5 Car Wash business is a problem child for Driven Brands. Across their ~420 US car wash locations, they are averaging barely above $1m in revenue per unit. This compares to Mister Car Wash that is at $2m+. The big delta here is the success with the membership programs. Mister has upwards of 4,000 car wash subscribers per location, which has driven their revenue from subscribers to 70%. On the other hand, Take 5 has only 1,700 car wash subscribers per location and is at ~55% revenue from subscribers. There have been leadership changes made, and the COO of Driven Brands, Danny Rivera, has now taken on personal responsibility for fixing the US carwash business (Danny led the scaling of Take 5 Oil Change). Ultimately, I believe that fixing the car wash business is going to be a matter of when not if, because they have an asset that no one else does, the ability to cross sell 12+ million (and growing) cars coming through Take 5 Oil Change each year. In a typical car wash like Mister Car Wash, 70% of your revenue might be coming from your member base, but 75% of the unique cars you see each year are non-members. By selling a small percentage of those customers on converting to car wash subscribers, Mister and others are able to effectively grow their subscriber bases. To some extent Take 5 Car Wash has done this with some success too. When they acquired their original car wash platform in the US it was only ~35% of revenue from subscribers and now it's ~55%. However, their operating playbook across their units remains inconsistent (result of fragmented legacy brands), and most of the units today have been branded as Take 5 Car Wash for less than a year. I believe the membership base, and thus the economics of Take 5 Car Wash, will fix itself given some time. 

Driven highlighted at the recent investor day that <1% of customers have visited both a Take 5 car wash and a Take 5 Oil Change. Of their 420 unit car wash base in the US, ~260 of them are within 10 miles of a Take 5 Oil Change. They began pilot testing a cross branding program  just in the past several months, and the results have been encouraging. They contacted 3 million customers from the Take 5 Oil change email CRM with a car wash promotion and roughly 6%, or 170K customers redeemed. Most of the promotions were either a $5 car wash, or $5 for your first month when you sign up for a membership. This redemption rate is 4x higher than what they see when emailing a Take 5 Oil Change offer. If they can convert just 1% of this customer base to car wash subscribers per year, then that would add 300-400 car wash subscribers per location over the next three years. Prior to this cross branding, they have added ~50 net car wash members per year. So taken together, you could be looking at $150k-$200k in additional membership revenue on a base of $1m per unit. It still would be a long way off from where Mister car wash is, but it would help immensely in fixing the economics. As a reminder, while this will be grossly oversimplified, here is roughly how they think about the economics of a car wash. Cost $6.5 million to build a new car wash location, which is often done by purchasing the real estate. Expect that unit to ramp to $1.5m in sales or so. 50% of topline goes toward site level expenses like labor, chemicals, cc processing, etc. You sale and leaseback ~90% of the capital back, which in today’s market creates ~$400k in annual occupancy cost. So you are left with $350K in EBITDA on $650K of net investment, or roughly 50% cash on cash. These locations requires ~$75K or so per year in maintenance capex, and I believe at $1m per unit, Take 5 car wash today is closer to $200k in store level EBITDA on average, which means their actual cash flow dollars are pretty slim when you factor in above shop overhead needed to run the system. Again, I believe this can fix itself given (1) time, (2) going hard at cross selling, and (3) nailing the basics at every location (i.e. make sure the machines in the tunnel are actually working, make sure sites are kept clean, make sure employees are trained to offer subscriptions to cars coming through, etc.). 

Finally, in addition to standard email CRM cross selling, Driven announced they are launching a new loyalty program and app, Take 5 Rewards in Q4 of this year. They had a video demo at the investor day recently (1hr 28m mark of the replay webcast), and it is 100x better than the current app they have for Take 5 car wash, and they currently have no app at all for Take 5 Oil Change. In tandem with this launch, they will create a new subscription program for Take 5 Oil Change, and will also be creating a dual subscription for Take 5 Oil + Car Wash. The app will enable them to encourage customer car care habits, drive repeat rate and upsell, and make the overall experience better. Driven made it very clear that they are in full assessment mode of the car wash business, looking in detail at every unit. I believe the most likely outcome here is that they identify 50-100 stores that should not be in the portfolio (underperforming and not near a Take 5 Oil Change), and they sell them off. However, in the event that for some reason they can’t fix the economics of the business, it's possible they would exit the vertical entirely, likely at a pretty big haircut to what they acquired the units for. I don’t see this as a likely outcome, and given that both the car wash and the glass business are EV neutral, management understands it will be important to get these strategic categories right. They have guided to ~20 car wash openings in 2024, and ceasing new builds in 2025 and 2026 until they can fix operations. I believe they intentionally went over conservative with guidance here, and believe Danny fully expects that they will be ready to start opening units again in the back half 2025. 

Auto Parts Distribution

Driven Advantage

Driven Brands launched Spire Supply in 2017, and a distributor of consumable products like oil filters and wiper blades to serve all Take 5 locations. This was simply a way to capture the distributor margin that was being paid away by their growing store base. And as the mothership, there are other areas where Driven has always benefited by controlling the procurement of their system base like in the group oil purchasing contract at all Take 5s, or in centralized purchasing of paint for Maaco and the collision brands. In 2023, Driven began its efforts to penetrate deeper into the $2.5 billion purchasing power of its 5,000+ and growing store base by launching Driven Advantage, an online platform that would fulfill all procurement needs for corporate and franchise stores. Instead of only controlling the large categories (oil, paint, tape, etc.), Driven has massively increased the SKU available through centralized procurement so that its stores can have a one stop shop for their needs, and so they can be assured that they are getting the best price. These additional SKUs are not only auto products, but everything you need to run a shop like tools, office supplies, etc. So far nearly all of Driven’s corporate stores are onboarded, 1000+ franchisees are onboarded ( the solution is currently only available to Driven’s system stores or any auto shop that is a member at ATI). On a typical store doing $1m in sales, they believe they are driving $50K a year in savings. And Driven benefits by receiving an 8-10% commission on every sale through their platform. This segment will grow rapidly as they onboard the remaining, 3000 franchisees, and there is optionality for a very scaled platform here if they open up to third party shops (on the roadmap for 2024). Driven advantage did $50m in EBITDA in 2022, and they believe they can grow by $35m+ by 2026. 

Valuation

At a very high level, Driven is targeting $850 million in EBITDA by the end of 2026, at which time I believe roughly half would convert to FCF. Thus, if they hit their numbers which they reconfirmed at the investor day, I believe you would be looking at a business that went from an 11% FCF yield today, to a ~20% FCF yield in a little over three years time. And over that period, leverage would go from 4.5x to <3.0x. On my numbers, I have them missing guidance by a bit in 2026 (which they could easily hit by doing some M&A - they guided to zero M&A over the next 3 years), but scaling to >$500m in after tax FCF by 2027. The base case scenario modeled below comes to a IV of $32.27 per share, or >150% upside to IV from the current share price

Catalyst

- buybacks

- continued FCF growth