MCW - Mister Car Wash: Time For A Good Clean

2023-08-06 05:05:57 ET

Summary

• Mister Car Wash has seen strong growth in recent years, but higher rents and interest expenses have hurt earnings and profitability.
• The company's IPO valuation was high at $6 billion, but since then, shares have been on a downward trend.
• The company's latest earnings report showed a 5% increase in sales, but comparable store sales growth was stagnant, and the full-year guidance was cut.

In April, I believed that shares of Mister Car Wash ( MCW ) were still not shining after it has seen strong growth in recent years. While strong growth was to be applauded, higher rents and interest expenses hurt earnings (and essentially profitability per location), making me cautious even as shares were approaching their lows again.

With the company cutting the full year guidance alongside the second quarter earnings report, earnings power is very modest and provides few reasons for fundamental support. While it is a positive that recent sale-and-lease-back activity has reduced leverage a bit here, it came at the expense of structural pressure on earnings.

Losing Its Shine

Founded in 1996, Mister Car Wash has seen continued growth under its mission as a happy and fun car wash business. The business went public at $15 per share in the summer of 2021, with shares rising to more than $20 on the first day of trading, as investors liked the prospects for the firm which has seen meaningful growth over a period of 25 years.

The company had grown to operate more than 300 locations in over 20 states, performing more than 60 million car washes based on single wash basis and subscription models. This gave the company a small market share in a market which measures an estimated 2 billion washes per year, comprised out of automated washes and do-it-yourself washes, with the latter segment on the decline.

The company commanded a $6 billion equity valuation at $20 per share, a valuation which even excluded a net debt load of half a billion. This was a huge valuation for a business which generated $630 million in sales in 2019 on which operating profits of $75 million were reported, with shares trading at 10 times sales and 80 times operating earnings.

Sales fell to $575 million in 2020 for obvious reasons, but the business actually became more profitable, as operating profits rose to $105 million. This came as the company collected lucrative membership fees, without having to deliver services for them.

Coming Down

Since the IPO it has been gradually downhill for the shares, as they fell to the $10 mark in the summer of 2022, as shares have largely traded in an $8-$10 range over the past year, that is until last week when shares fell to fresh lows of $7.50 per share.

In the meantime the company has seen growth, but nothing too convincing. 2021 revenues rose by 32% to $758 million, with adjusted earnings of $136 million coming in at $0.44 per share, in line with my expectations around the time of the IPO, as growth benefited from easy comparisons. The 2022 guidance was a bit soft because even as revenues were set to grow to $885 million, adjusted earnings were initially seen flattish at $0.44-$0.47 per share.

As it turned out earlier this year, the company missed the full year guidance by some margin. Full year sales came in at $877 million, now generated by 436 locations, with net earnings coming in at $113 million, equal to $0.34 per share, and adjusted earnings coming in at $0.40 per share. With most of the six cent discrepancy stemming from stock-based compensation expenses, realistic earnings came in close to $0.34 per share.

Net debt of $830 million was high with EBITDA reported at $282 million, for a 3 times leverage ratio. The company guided for 2023 sales to rise to $925-$960 million, with EBITDA set to rise in a very modest fashion to $287 million, although much less pronounced than the anticipated increase on the topline.

Amidst increasing D&A expenses, (among others) adjusted earnings are actually seen down to $100-$115 million, equal to $0.30-$0.35 per share. With rent and interest expenses being up, investors were embracing for another tough year.

With realistic earnings falling below $0.30 per share, it was hard to get upbeat at $8 per share if we look at the resulting earnings multiples. Moreover, leverage is high as well, as there simply was little to look forward to, certainly not in a tougher economic environment, with car washes being largely a discretionary product.

The Latest Soft Report

Early in August, Mister Car Wash reported a 5% increase in second quarter sales to $237 million, although that comparable store sales growth came essentially to a standstill. The company opened 9 new locations and acquired another facility during the quarter, pushing the location count to 449.

The company landed more members, in fact it added another 59,000 members for a total customer count of 2.1 million members, with members responsible for 69% of washes sales performed during the quarter. Trying to address leverage a bit, the company engaged in sale-and-lease-back for 18 locations, generating $80 million in proceeds, reducing net debt to $760 million in the process, but adding to the rent burden in the meantime.

The company cut the full year sales guidance to $913-$936 million with EBITDA now seen at a midpoint of $277 million and adjusted earnings seen between $0.28-$0.32 per share.

The shortfall is worrying, and while leverage actually will tick down to 2.7 times, as a result of the sale-and-lease-back transactions being executed on, the issue is that structural earnings power will continue to come under pressure. With stock-based compensation expense trending at six cents this year, realistic earnings have fallen to less than a quarter, as the situation remains rather dicey.

And Now?

With shares down to fresh lows, there is a mixed picture emerging here. The company has seen relentless earnings pressure, but the positive news was that leverage comes in lower than I anticipated, alleviating some of the worst fears on that front.

That said, it feels as if growth of the business, rather than growing shareholder value is the mantra here, with the implied value of the recent sale-and-lease-back of locations only amounting to $4-$5 million per store, as greater capital and growth discipline here would likely be welcomed.

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