2021 was a big year for initial public offerings, including such notables as Roblox (RBLX, Financial), Bumble (BMBL, Financial), Rivian (RIVN, Financial), Figs (FIGS, Financial), and Oatley (OTLY, Financial). My favorite, and one that went under the radar to some degree, was Mister Car Wash Inc. (MCW, Financial). The company is the largest car wash chain in the U.S. with 449 locations as of the end of the second quarter of 2023. The company derives the majority of its revenue from its Unlimited Wash Club subscription offering. The company has historically grown predominantly through acquiring and rebranding smaller competitors, but has more recently begun to add new greenfield locations.
The company was formerly known as Hotshine Holdings Inc. and changed its name to Mister Car Wash in March 2021. The company was founded in 1969 and is headquartered in Tucson, Arizona. The company went public in June 2021 and currently has a market capitalization of $2.3 billion.
Operations
The business has both exterior washing operations and interior cleaning locations. Express Exterior locations offer self-drive exterior cleaning services and include free vacuums available for customer use. Customers purchase a wash directly or can sign-up for an Unlimited Wash Club membership through sales kiosks or by team members. Customers remain in their vehicle through the tunnel and wash process and customers have the option to use free self-serve vacuums at any time before or after their exterior wash.
Interior Cleaning locations offer exterior and interior cleaning services, including vacuuming by team members. Customers can also purchase a wash directly or sign-up for a membership. Either the customer remains in the vehicle through the tunnel and wash process or wait in the lobby. Customers who purchase interior cleaning services have their vehicles vacuumed and cleaned by company team members.
The company derived 68% of sales from its Ultimate Wash Club membership in 2022. Prices vary per location and type of offerings, but the Titanium UWC is roughly $40 and includes higher-end services and products. The Premium membership is approximately $30 and the Base is $20. In the 2022 fiscal year, the company increased overall membership penetration from 64% to 68% of total wash sales. It is estimated that the average member spends more than four times than that of the retail car wash consumer. At both new greenfield and acquired locations, the company has developed proven processes for growing UWC membership per location.
Financial results
The company recently reported second-quarter results. Net revenue increased 5.2% to $236.9 million compared to $225.2 million in the prior-year period. Same-store sales increased 0.3% compared to a 2.4% increase a year ago. The company added approximately 59,000 net new Unlimited Wash Club members. As of June 30, the company had approximately 2.1 million members, which represented a 12.2% increase over the prior-year period. Membership sales represented approximately 69.4% of total wash sales compared to approximately 66.2% last year.
Nine new greenfield locations were opened in the quarter and the company acquired one location. The total number of car wash locations operated was 449 as of June 30, an increase of 9.8% from 409 locations a year ago.
Net income was $27.1 million and earnings per share came in at 8 cents. Adjusted net income and diluted adjusted net income per share were $29 million and 9 cents respectively. Adjusted Ebitda decreased less than 1% to $73.9 million.
Cash at the end of the quarter was $136.1 million and total debt was $896.6 million. Based on expected 2023 Ebitda of $277 million, the leverage ratio was reasonable at 2.75.
Mister Car Wash CEO John Lai said,“We had a solid second quarter. Our Unlimited Wash subscription business remained strong and stable, comparable store sales returned to positive territory, operating margin improved sequentially from the first quarter, we generated $74 million in adjusted EBITDA and net income of $27 million, and we are pleased with the Titanium rollout and implementation process. Our foot is firmly on the pedal of greenfield expansion, as we opened 13 new stores year to date and remain comfortable with our full year target of approximately 35.”
Valuation
The valuations for the company do not seem stretched for a growth company. Based on 2023 consensus earnings estimates of 30 cents per share, the company is selling for 24 times earnings. The enterprise value/Ebitda ratio is approximately 13 based on 2023 estimates.
The GuruFocus discounted cash flow calculator creates a value of $8.27 when using an earnings starting point of 33 cents and a 15% 10-year growth rate.
There are seven Wall Street analysts that have recent price targets for the company. The average is $10.36 with a high of $12.50 and a low of $7.
The company currently does not pay a dividend.
Guru trades
A guru who has purchased shares of Mister Car Wash recently is Jeffries Group. Investors who have sold out of or reduced their positions include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Joel Greenblatt (Trades, Portfolio).
Summary
Mister Car Wash is a well-managed company with a solid track record of growth and profitability. There appears to be large-scale opportunities for greenfield development and acquisitions as the company operates in only 21 states at this time.
One headwind may be if home-based work continues to be popular. This would decrease commuting and the demand for car services. However, the company still represents a potential opportunity for long-term investors looking for small-cap growth exposure.
