MCW - Mister Car Wash: Still Not Shining

2023-04-08 08:28:54 ET

Summary

• Mister Car Wash has seen strong growth in recent years.
• Continued growth is to be applauded, but higher rent and interest expenses will hurt earnings (again).
• With earnings power under pressure for a while, I am still cautious even as shares trade near their lows.

Shares of Mister Car Wash ( MCW ) surfaced on my radar as they appear on the 52-week low list in recent days. Continued operational growth and a decline in MCW stock price is enough of a reason to update the thesis, which goes back to August of last year, when I concluded that there was no shine yet.

I arrived at that conclusion even as shares were cut in half from their highs already. High valuations from the get-go, and the fact that its service was largely discretionary, made me cautious. As such, I did not see fundamental support yet in the summer of last year.

Car Wash Empire

Founded in 1996, Mister Car Wash has seen continued growth as a happy and fun car wash business. The company went public in the summer of 2021 at $15 per share, as shares rose to the $20 mark on the first day of trading.

The company operated more than 300 locations in 21 states at the time, performing some 60 million car washes per year. The company caters to customers on a single wash basis and through subscription models.

Despite these impressive numbers, the market share is small as the US car wash market totals 2 billion washes per year, comprised out of automatic washes and do-it-yourself washes, with the latter segment falling on a relative basis.

With nearly 300 million shares outstanding, the company commanded a $6 billion equity valuation following the public offering, as the company furthermore operated with a net debt load of around half a billion. This valued the company at nearly $20 million per location, based on a location count of 344. Ahead of the offering, the company posted $75 million in operating earnings on sales of $630 million in 2019. Needless to say, valuations at around 10 times sales and 80 times operating earnings were quite demanding.

With sales falling to $575 million in 2020, for obvious reasons, operating profits rose to $105 million, in part because the company collected lucrative membership fees, without delivering a performance for them. Even as I believed that net earnings might be seen around $135 million following the offering, the earnings power of just around half a dollar translated into a sky-high valuation, although the company had a huge growth runway left.

Expectations Come Down

Since the IPO shares had gradually fallen to the $10 mark in August of last year, with shares down a third from their initial offer price, and down nearly 60% from their highs. This came as 2021 revenues rose 32% to $758 million with adjusted earnings of $136 million coming in at $0.44 per share, roughly in line with my expectations at the time of the offering.

The 2022 guidance was lackluster with revenues seen up to $885 million as adjusted earnings were seen quite flattish at $0.44-$0.47 per share. More so, net debt of $876 million was high, with EBITDA coming in around a quarter of a billion.

With inflationary pressures pushing up the cost base of the company, and hurting demand as this is a discretionary service after all, the company did see pressure over the summer. Following softer performance, the company cut the full-year sales guidance to $870 million, with earnings now seen between $0.36 and $0.39 per share. Net debt of $857 million translated into a 3.1 times leverage ratio based on $273 million in EBITDA.

With earnings power seen around $0.30 per share, the resulting 30 times earnings multiple looked demanding, even as shares had come down a great deal already, making me not yet willing to consider shares at the time.

Coming Down Further

Since voicing a cautious tone at $10 in August, shares have fallen another 20% to $8 per share right now, trading at their lowest levels since the initial offering. In November, the company posted a 12% increase in third quarter sales to $218 million, with comparable sales growth seen near 3%.

In February, the company posted a similar 12% increase in fourth quarter sales, with comparable revenues up 4%. Full-year sales came in at $877 million, generated by 436 locations, with revenues coming in slightly ahead of the lowered guidance. Net earnings came in at $113 million, equal to $0.34 per share based on a share count of 327 million shares, with adjusted earnings posted at $0.40 per share. This difference largely comes from stock-based compensation expenses which are adjusted for, something I do not agree with, hence my focus on the GAAP earnings in this case.

Net debt of $830 million was equal to just below 3 times EBITDA, based on a $282 million EBITDA number.

For 2023, the company sees sales increase in a modest fashion to $925-$960 million. While the midpoint of the adjusted EBITDA guidance is set to rise slightly to $287 million, adjusted earnings are set to fall to $100-$115 million, with adjusted earnings seen down by five to ten cents to $0.30-$0.35 per share.

This is mostly due to higher interest expenses and rents, as the higher capital spending requirements does not provide much comfort to investors, with another disappointing year in the making, at least from a profit perspective.

And Now?

The reality is that I am not impressed with this performance. Realistic earnings power of $0.35 per share in 2022 will fall to around $0.30 per share, or less this year, while leverage will likely be flattish around 3 times. This makes me still quite cautious at $8 per share.

The company sees a huge headwind to its business model this year, while the situation appears manageable and the long-term potential certainly is seen, there is little to look forward to in 2023.

Given all these moving targets, the valuation looks expensive based on current earnings power, but the potential continues to be seen. Hence, I am not willing to buy shares here just yet, although I am happy to buy shares at lower levels given the long-term potential.

For further details see: