I ran into this stock when screening for companies with significant leverage as short ideas. What initially interested me was that carwashes intuitively didn’t seem to have too many scale advantages and I initially thought their subscription model could be destroying value.
Why the Conveyorized Car Wash is an attractive business idea
The development of conveyor systems, where you park your car and a conveyor belt runs your car through the washing process enabled a quicker wash and higher throughput of cars because (1) there are less moving parts than a traditional gas station in-bay car wash and (2) these systems can wash more than one car at a time.
This higher throughput enabled the creation of a subscription model where customers can sign up and have unlimited washes during the month. With a predictable revenue stream these businesses engaged in sale leaseback transactions to reduce their deployed capital, effectively boosting returns. Each new location takes ~$6M to build, but the property can be sold to a REIT for ~$4M, leaving a ~$2M net investment in the business.
In addition, the typical Express Car Wash has ~$1.6M revenues, ~15% of revenues in variable costs (85% incremental margins!), ~45% of revenues in fixed costs and a ~40% EBITDA margin (~30% ROE after ramp-up).
Company Overview
Mister Car Wash operate 462 locations across the USA. They specialize in operating express tunnel car washes, where vehicles are washed in <2 minutes vs. 5-8 minutes for a traditional gas station in-bay car wash.
Growth comes from a mix of greenfield developments and acquisitions. They partially fund their acquisitions through sale leasebacks of properties, reducing the investment in each new location and boosting returns. Unlimited Wash Club is the name of their subscription service, offering unlimited car washes starting at $20 / month.
Investment Thesis
My investment thesis has three main points:
Their Same Store Sales numbers will disappoint in 2024
Growth prospects for new stores are mostly gone
As a result, they will trade down to basically replacement cost
Same Stores Sales (SSS)
The stock has traded down since their 2Q23 results when the company announced a revised guidance of a flat top-line in 2023. The market thinks MCW will return to growth in 2024 with consensus modeling ~3.5% top-line growth. I think this is too optimistic and MCW is likely to repeat a flat or declining top-line year. There are two main reasons I believe this:
Tailwind of new stores ramping up is declining: the typical express car wash location takes 3-4 years to ramp up, but MCW considers them in their SSS numbers on the 13th month. I estimate new car wash openings likely contribute ~6p.p. to their SSS growth number. 2023 may have already started seeing this trend, but it will definitely be very visible in the 2024 numbers.
Competition is much more intense than the street realizes. I wrote a Python script to map out competition at >400 MCW locations and found a competitor within 2 miles at >90% of these locations. Further, these competitors are offering significant discounts for new member sign-up.
Growth prospects are declining
Express car washes enabled the trend of consumers washing their cars outside of their homes. This trend has flattened out.
Market is already close to saturation on new car washes. One Express Car Wash CEO sees the market as saturated when there are ~20,000 people per express car wash. We are likely past that number and fast approaching ~17,500
Multiple Re-Rate
As a result of declining SSS and growth prospects I think the company is due for a re-rate and expect it to trade at ~$3.0M (50% premium to replacement) plus any balance sheet items.
