DRIVEN BRANDS HOLDINGS INC DRVN
September 28, 2023 - 2:03pm EST by
nola18
2023 2024
Price: 12.67 EPS 0 0
Shares Out. (in M): 167 P/E 0 0
Market Cap (in $M): 2,126 P/FCF 0 0
Net Debt (in $M): 2,600 EBIT 0 0
TEV (in $M): 4,726 TEV/EBIT 0 0

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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.