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Investment action
I recommended a buy rating for Mister Car Wash’s (NYSE:MCW) when I wrote about it the last time, as the upside potential remains attractive if MCW is able to execute its upsell growth strategy. Based on my DCF model, I thought the stock was worth $8.80, which the stock had touched just weeks before the 4Q23 results were out. Based on my current outlook and analysis of MCW, I am downgrading my rating to a hold rating. MCW did not perform as I expected as comp sales continued to be weak, indicating no recovery momentum at all. When compared to peer’s performance, it suggests that MCW could be losing market share despite rolling out its titanium offering. Note also the fact that Titanium is currently on trial promotion, which means the actual unit economics and adoption rate are not known yet. Because of all these uncertainties, I am switching to a conservative stance—a hold rating—for the near term.
Review
MCW reported 4Q23 comparable store sales grew 0.7% y/y, driving total revenue to $230.1 million (7.4% y/y growth). The business also reported an adj. EBITDA margin of 30.2%, which beat consensus estimates of 28.7%, equating to an adj. EBITDA of $69.5 million, above consensus of $66.1 million. EPS came in at $0.07, in line with consensus.
To be honest, the results were not great and did not reflect the momentum that I was looking for, as comparable sales remained low at just 0.7% (vs. 4% in 4Q22 and 1.7% in 3Q23). The performance is even worse when considering two facts: (1) 3Q23 was a period that faced bad weather conditions, so 4Q23 should have been better vs. 3Q23; and (2) 4Q23 benefited from the rollout of Titanium. Hence, 4Q23 performance really showed that the business is getting heavily impacted by macro pressure—softer retail trends—and its internal growth initiative (Titanium) is simply not strong enough to combat this.
Management guidance was another blow to the near-term outlook for the stock as they guided a 2024 comp sales growth range of 0.5% to 2.5%, suggesting that FY24 is not going to see any strong recovery and the current trend is going to continue. This was not the only disappointment compared to consensus expectations. Management also guided FY24 sales figures of $988 to $1.016 billion (8% implied growth at the midpoint) and EBITDA figures of $291.5 to $308 million (the midpoint of ~$300 million was below the consensus estimate of $312.9 million). With this guide, it really makes me wonder if the titanium offering has any positive impact on the business. The situation is made more murky by the fact that management did not quantify the embedded titanium benefit after 2023, instead referring to ongoing trial promotions that muted top-line and margin flowthrough.
Author’s work
Lastly, when compared to Driven Brands Holdings (DRVN) performance, it seems like MCW is losing a lot of share as well, despite putting the Titanium offering on trial promotion. If you look at the chart above, over the past 2 years, DRVN has outperformed MCW by ~700 bps on average, and notably, it has stayed positive throughout FY23 despite a strong comp sales base in FY22.
All in all, because of the uncertainty in the benefits from MCW’s Titanium offering, the lack of recovery strength in comp sales (also suggesting weakness in upselling initiatives), and poor FY24 guidance, I am downgrading my buy rating to hold for the near term. That said, I am still hopeful for the medium- to long-term aspects of the business, in particular its recurring revenue subscription base and potential upside from the Titanium rollout. For titanium, it is true that it is something that is uncertain at the moment, but that does not mean it cannot work. We can only see the true impact of it once the trial promotion ends. Based on management’s comments, Titanium 360 appears to be exceeding expectations with its 15% penetration rate, which is significantly higher than the 10% target rate set for the first year of implementation. This data does show that the offering resonates with consumers; the problem is how sustainable this demand is, and we can only know after the trial ends.
Valuation
Author’s work
Unlike my previous model, where I used a long-term DCF, I have switched to a near-term relative model to incorporate the near-term weakness and uncertainty that I talked about above. Previously, I expected the business to continue growing at 10% during its growth stage; however, I now model 8% growth for the foreseeable future (using FY24 guidance as a baseline). As for margins, as per management guidance, they are expecting a further decline in FY23 to 30%, which I think is fair given that they are going to continue the Titanium trial offering in FY24. When that rolls off, I expect the margin to recover to historical levels (at least the midpoint of FY22/23 levels). Finally, to reflect the near-term uncertainty, I am going to attach an 11x forward EBITDA multiple to the stock. For note, 11x is the low end of the MCW historical trading range.
Final thoughts
I am downgrading Mister Car Wash to a hold rating due to several uncertainties and concerning trends. 4Q23 results were disappointing, with continued weakness in comparable sales and a lack of recovery momentum. This suggests MCW may be losing market share, especially considering the rollout of Titanium. Although early signs of Titanium adoption look promising, the trial promotion makes it difficult to assess its true impact on unit economics and long-term viability. Lastly, management’s FY24 guidance implies tepid growth and margins below consensus expectations, raising further concerns about the effectiveness of MCW’s current initiatives.
