- Mister Car Wash has been a strong growth prospect with positive cash flow in recent years.
- At first glance, shares of the company are pricey, but that doesn't mean they aren't appealing.
- Current growth suggests upside potential exists and that the premium for the company might be worth it.
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One company that just became publicly traded earlier this year is a firm called Mister Car Wash (NYSE:MCW). As its name suggests, the enterprise owns a network of car washes and provides services along those lines. Despite experiencing something of a downturn as a result of the COVID-19 pandemic, the company's general trajectory has been encouraging. This year, growth continues, and it is obvious that the future for the business is bright. The risk profile of the company is favorable for investors, but it is important to keep in mind that shares don't come exactly cheap.
A car wash giant
At present, Mister Car Wash operates 351 car washes throughout its network that is spread across 21 states. This is up from the 344 locations seen at the end of its first quarter this year and compares to the 342 locations the company ended 2020 with. In the trailing 12 months ending in its first quarter, the company boasted that it washed 59.6 million vehicles. Interestingly, an estimated 62% of its wash sales and 70% of its wash volume can be chalked up to the 1.53 million Unlimited Wash Club members the company has. Pricing for this premium subscription ranges from a low of $19.99 per month to a high of $69.99 per month. It offers both interior and exterior subscriptions.
This membership program has been instrumental in the company's success in recent years. It initially launched back in 2010, bringing in just 36,350 subscribers in its first year. By 2016, the company had grown with the service to 331,000 subscribers that accounted for 36% of its overall sales. Growth still remains strong, with the increase in the first half of 2021 representing growth of 24.4% over the 1.23 million subscribers that the company had at the end of 2020. So it is highly probable that the firm will continue to see a larger portion of its business come from these users in the future.
In terms of the overall industry, Mister Car Wash has a nice stake. It claims that its market share is just under 5% nationwide. And the market as a whole is incredibly fragmented, with the top 10 players combined representing less than 10% of the industry. As the largest national car wash brand in the country, this gives the enterprise a great deal of potential to grow. That is especially when you consider that 74% of the locations in the US are owned by parties controlling only one or two locations apiece.
A key driver of the revenue growth achieved by Mister Car Wash has been its ability to acquire these smaller firms. Back in 2016, the company had just 202 locations. The increase from that to the 342 seen at the end of 2020 helped to drive sales higher. They increased each year, climbing from $364.08 million in 2016 to $629.53 million in 2019. But then, in 2020, the industry experienced weakness because of the COVID-19 pandemic. That pushed revenue down to $574.94 million. This contraction can be seen when looking at comparable store sales. After ranging from a low of 6% to a high of 10% over the past few years, comparable store sales declined by 11% in 2020.
Author and SEC filings
As the chart above illustrates, net profits for the company have been all over the place. However, operating cash flow has been more consistent. Despite having one year of decline between 2018 and 2019, the general trend has been for it to come in stronger year over year. In all, operating cash flow grew from $35.92 million in 2016 to $101.85 million last year. A similar trend can be seen when looking at EBITDA. It increased from $79.02 million in 2016 to $161.08 million in 2020.
Author and SEC filings
So far this year, the company is showing some nice signs of recovery. Revenue in the first half of the year totaled $372.59 million. That represents an increase of 44.9% over the $257.11 million generated the same time a year earlier. The company did see its profitability decline, dropping from a positive $0.11 million to a negative $85.72 million. However, operating cash flow more than doubled, climbing from $53.85 million to $119.68 million. And EBITDA skyrocketed, jumping from $68.22 million to $134.55 million. The company truly benefited from improved comparable store sales, which came in at 50% in the first half of the year, driven by a 93% year over year increase in the second quarter. It also helps that its premium subscription roster grew by 38.7% year over year.
A pricey but attractive business
When it comes to pricing the company, things are a little tricky. The safe thing to do is to price the company based on 2020 figures. This would give us a price to operating cash flow multiple of 50.9 and an EV to EBITDA multiple of 35. No matter how you stack it, these numbers would clearly be in overvalued territory. However, the growth in store count, the pattern seen in a recovery for comparable store sales, and the rise in membership subscriptions all serve as a sign that this turnaround is not a temporary glut. It helps that the services the company operates are recurring in nature and not one-off purchases by consumers.
If we extrapolate from results seen so far this year and apply that data to the rest of the year, then Mister Car Wash should be trading at a forward price to operating cash flow multiple of 22.9. Meanwhile, the EV to EBITDA multiple stands at 22.6 if we use management’s own guidance that can be seen above. In addition, the risk profile of the business is low with a forward net leverage ratio of 1.8. This helps to counter the argument that shares are definitely not cheap at current levels. That said, with the kind of growth the company has experienced over time, and when considering that the business is an industry leader, with plenty of upside potential from further industry consolidation, pricing doesn't look awful either.
Based on the data provided, Mister Car Wash is an interesting business that is in an interesting phase of its life. The company continues to demonstrate attractive performance, although net profits could definitely be better. Cash flow is encouraging, and it has plenty of room to grow in the long run. While shares are not exactly cheap, they definitely don't look expensive when you take all of this into consideration. And because of that, it may make sense for investors to consider adding a holding like this to their portfolios.
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This article was written by
Daniel is an avid and active professional investor.He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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