Headwaters Capital: Driven Brands ($DRVN) Investment Case
In their Q3 2025 investor letter, Headwaters Capital introduces Driven Brands as a new position, initiated in July following a portfolio transformation that fundamentally improved the company’s financial profile. Headwaters Capital, led by Christopher Godfrey and known for avoiding private equity-backed IPOs, makes an exception for Driven Brands due to the strategic sale of its problematic US car wash business that has unlocked significant value. The letter emphasizes the firm’s framework of seeking quality businesses trading at attractive prices in forgotten parts of the market while AI-related stocks command excessive attention. Headwaters’ decision to invest in Driven Brands reflects their conviction that the company’s simplified portfolio, featuring high-growth Take 5 Oil Change and stable franchise brands, deserves a multiple in line with peers rather than its current depressed valuation following years of operational challenges.
Investment Highlight: Driven Brands Holdings Inc. (DRVN)
Business Overview
- Largest automotive services company in North America
- Portfolio of well-known brands across maintenance, repair, paint, collision, and car wash
- Key franchises: Take 5 Oil Change, Meineke Car Care, Maaco, CARSTAR, and AutoGlassNow
- Franchise and company-operated model providing recurring revenue
- Assembled by private equity firm Roark Capital (61% ownership), specializing in consumer and franchise businesses
- IPO’d in January 2021 at $22, peaked at $34, declined ~50% since
Market Position
- Leader in non-discretionary automotive maintenance and repair services
- Take 5 Oil Change competing with Valvoline, Grease Monkey, and Jiffy Lube
- Differentiation based on customer service, real estate location, and local market scale
- Quick lube category steadily taking market share from dealerships and independent shops
- Strong brand recognition across thousands of locations
Performance Analysis
- Portfolio Structure – Two Distinct Businesses: Mature Franchise Portfolio:
- Collection of brands operating under franchise model with Driven as franchisor
- Key brands: Meineke (maintenance/repair), Maaco (paint/collision), CARSTAR (repair)
- Non-discretionary maintenance and repair services creating steady, high-margin franchise revenues
- Mature markets with little to no growth but predictable cash flow
- Cash flow leveraged to invest in higher growth assets
- Fast, full-service oil change brand specializing in quick, convenient service without appointments
- Services limited to oil changes and ancillary services (filters, wiper blades)
- Value proposition: convenience, speed, and low-cost versus dealerships and independent shops
- Strong unit economics with 28% cash-on-cash returns for franchisees
- Mix of company-owned and franchise locations
- Currently 1,300 stores operating
- Expected 150 new store openings per year combined with 3% same-store sales growth
- Revenue growth potential of +11% CAGR over next four years
- Operating income growth should approximate top-line growth
- Critical Portfolio Transformation (February 2025):
- Sale of problematic US car wash business to Oaktree-backed platform
- US car wash faced structural deterioration from increased competition (PE overinvestment 2019-2022)
- Capital-intensive nature pressured cash flow
- Sale proceeds utilized to reduce leverage
- Capital no longer diverted to car wash; now produces strong free cash flow
- Free cash flow allocated to further debt reduction and Take 5 growth
- Elevated leverage concerns and poor cash flow issues now behind company
- Historical Context and Recovery:
- Roark brought DRVN public in 2021 at frothy 30x EBITDA valuation
- Raised $760 million equity, reduced leverage from 9.5x to 5x at IPO
- Poor US car wash performance weighed on stock (declined ~50% from peak)
- Elevated leverage, poor cash flow, and structural car wash problems tied management’s hands
- Simplified portfolio now deserving of higher multiple in line with peers
Growth Runway and Embedded Options
- Take 5’s faster growth creating positive mix shift for consolidated entity
- Take 5 EBITDA growth outpacing rest of portfolio, serving as steady tailwind for multiple expansion
- Two embedded call options:
- International Car Wash Sale: No strategic reason to maintain European car wash after US sale; sale appears inevitable, would accelerate debt reduction and growth investment
- AutoGlassNow Growth: Glass repair/replacement for retail and commercial fleet; recent small regional insurance contracts; potential to emerge as second growth asset once leverage improves
Market Dynamics
- Recurring revenue characteristics from non-discretionary automotive services
- Quick lube category has room to continue taking market share
- Auto maintenance/repair facing cyclical headwinds from lower insurance claims and pressured low-end consumer
- Cycle eventually turning in DRVN’s favor after 2 years of pressured comps
- Similar franchise models trade at 10x EBITDA; auto repair peers at 11.5-13x EBITDA
Valuation
- No pure-play comp; closest peers: Valvoline (VVV) for Take 5, Boyd Group (BYD) for franchise business
- VVV traded at 12x EBITDA pre-September sell-off; Take 5 deserves modest premium given faster growth
- Boyd Group trades at 11.5x EBITDA (traded 13-14x during healthy periods)
- Blended 10-12x EBITDA appropriate for franchise asset
- Using blended 11x EBITDA on 2027 EBITDA yields $29.50 price target (+108% upside from $14.33)
- DRVN traded at 11x EBITDA at year-end 2023 when car wash pressured and leverage concerning
- Normal market environment: 12-13x EBITDA achievable
- Current consolidated multiple: 10.7-10.9x EBITDA (2025-2027)
Capital Allocation and Leverage
- Cash flow directed to debt reduction, accruing value to equity holders
- Net debt declining from $2.0 billion (2025) to $1.5 billion (2027)
- Improved free cash flow enabling growth investment
- Once leverage at palatable levels, AutoGlassNow could receive more focus
Roark Ownership as Catalyst
- Roark holds 61% majority ownership
- Hold period approaching 10 years; motivated to increase share price
- Recent portfolio actions (US car wash sale, smaller business divestitures) evidence of value recognition efforts
- Presence of motivated financial owner supports international car wash sale thesis
Risks
- Cyclical headwinds from lower insurance claims and pressured low-end consumer
- Auto maintenance/repair comps under pressure for 2 years
- Quick lube market somewhat commoditized; real estate location critical
- Integration risk from rapid Take 5 expansion (150 stores/year)
- Execution risk on franchise growth and same-store sales targets
- Still-elevated leverage despite reduction efforts
- Competition in quick lube space from established players
- Private equity ownership (Roark 61%) creates overhang and alignment concerns
- Electric vehicle adoption long-term threat to oil change business model
- Economic downturn could pressure discretionary maintenance spending
- International car wash sale timing uncertain
Other Key Points
- Stock declined 25% in September on no news following Oracle-OpenAI announcement
- Perfect example of AI-driven market bifurcation; non-AI stocks punished indiscriminately
- Purchased at ~$17 average in July; strong August results followed by steep September decline
- Stock down 21 of 23 trading days post-Oracle announcement despite no fundamental change
- Company trades at depressed valuation despite portfolio improvement
- As general rule, Headwaters avoids PE-backed IPOs; DRVN exception due to transformation
Headwaters Capital views Driven Brands as a quality business with recurring revenue characteristics trading at an unjustifiably depressed valuation following its portfolio transformation, citing the sale of the capital-intensive US car wash business improving free cash flow and leverage, high-growth Take 5 Oil Change (expected +11% CAGR with 150 new stores annually) driving accelerating consolidated growth through mix shift, stable franchise portfolio providing predictable cash flow, and multiple expansion potential to 11-13x EBITDA in line with peers as key factors. They believe the simplified portfolio with reduced leverage, improved cash flow generation, and motivated 61% owner Roark Capital seeking exits offers significant upside, with a 2027 price target of $29.82 (+108% from $14.33) as the market recognizes the company’s improved financial profile, while embedded options from potential international car wash sale and AutoGlassNow growth provide additional upside optionality.
