Mister Car Wash

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 3/5

Mister Car Wash is the largest car wash chain in the United States, with both full-service and express locations, emphasizing speed and quality, and operates both directly and through franchised agreements.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Mister Car Wash (MCW) is a national chain providing exterior and interior car washing services. It operates in 21 states as of December 2023, offering several service options including express exteriors, interior cleaning, and full service. MCW distinguishes itself through the “Unlimited Wash Club” membership which aims to create customer loyalty and increase recurring revenue. This allows customers to wash their cars as many times as they want in the month for a specific price. The company focuses on high-volume, modern facilities designed to give customers quick and effective service. Furthermore, the carwash industry is highly fragmented, with many independent operators and smaller chains competing with major players like MCW.

Moat Analysis (2/5):

  • Brand Recognition (Weak): While MCW has a growing presence and is the largest chain in the U.S., it doesn’t possess a strong brand moat like, say, Coca-Cola in the beverage industry. Many people simply go to whatever carwash is the most convenient and closest to them, they rarely have a favorite brand of carwash. In addition, the carwash market has numerous small businesses and franchises, that people typically will be fine going to if it’s convenient. There is limited brand loyalty in the carwash market.
  • Scale Advantages (Moderate): MCW benefits from economies of scale due to its large network, potentially leading to lower per-unit costs and better bargaining power with suppliers. However, carwashes are often localized, and the advantage isn’t particularly strong.
  • Network Effects (Weak): While the unlimited wash club does create a sticky element, the actual network effect is minimal. The fact that other people use MCW does not inherently increase the value of the service for other people. There are no other users to interact with or share data and information. Therefore, network effects cannot be a source of competitive advantage.
  • Switching Costs (Low to Moderate): The unlimited wash club does create some switching costs, the monetary cost of cancelling a membership and starting a new one with another carwash is virtually zero. However, the fact is most people may just go to whatever carwash is most convenient for them at the time, meaning there’s limited switching costs at play. Also there are many different carwash companies and people are happy switching between them. Therefore switching costs are weak and are not particularly a source of competitive advantage.
  • Intangible Assets (Weak): MCW does not have any patents, licenses, or regulatory permissions in place that would create a strong competitive advantage.

Overall, MCW’s moat is rather weak. It does not have much pricing power, or any strong moat that prevents smaller competitors from quickly stealing their business. It does have some benefits of scale, but mostly the advantage comes from locations and speed. Therefore, it is a very competitive industry that makes it difficult to be profitable in the long run.

Risks to the Moat and Business Resilience:

  • Competition: The car wash industry is highly fragmented, with low barriers to entry, meaning new competitors can easily come in and steal business from MCW. There are many small players which means MCW has no real moat and is vulnerable to new entrants and competition. There are many car wash companies around the country, both small and large.
  • Location Specificity: MCW is highly location dependent. It is not possible to simply move a carwash to another place, which makes it difficult to scale the business. Furthermore, if better carwash locations open up next to current locations, they could directly take away market share from current locations.
  • Economic Sensitivity: Carwash services are considered discretionary expenses and therefore are susceptible to economic downturns. When discretionary spending is down in the economy, people may spend less money at carwashes. This makes MCW prone to recessions.
  • Technological Change: While technology hasn’t had a significant impact yet, any innovations like new self-washing techniques or automated solutions could make older wash technology obsolete.
  • Rising Costs: The cost of labor, chemicals, and supplies is prone to inflation, which can increase input costs for carwashes and decrease margins if they are unable to pass these costs on to consumers.
  • Weather: Carwash business is heavily correlated to weather. If there is a long period of rain, most people won’t be going to car washes.

Despite the risks, there are elements of business resilience. MCW is in a fairly stable industry. People will always want to clean their cars. Therefore, while earnings may fluctuate due to economic and weather factors, demand will always persist.

Financials Deep Dive:

  • Revenue Distribution: Most of MCW’s revenue comes from membership in the UWC program, with wash sales coming after. The more UWC subscribers they have, the more resilient their business would be since subscriptions are recurring revenues.
  • Margins: Gross margins are relatively consistent, hovering around 60%. Net profit margins are in low double digits. One of the advantages of carwashes is low capital intensity once they have setup the initial structure, meaning most of the revenue will flow into profits if they are able to keep costs down.
  • Capital Structure and Debt: MCW has significant amount of debt, primarily long-term debt which they have accumulated through acquisition activities. They have also a substantial amount of operating leases. Debt is not always a bad thing, if they can use it to generate higher returns, but right now debt makes it difficult to generate consistent profits.
  • Growth and Expansion: MCW has a strong growth rate, they have grown from 20 locations to over 400 locations from 2000 to now. Also, they are growing their membership program and increasing their revenues, all indications are their growth will continue for the foreseeable future.

Latest Concerns, Controversies, and Management Response:

  • Cost Inflation: Management addressed the current cost inflation in their earnings calls. They stated that the company has implemented incremental pricing increase over the past years, and they have been able to mitigate increased costs by increasing prices without sacrificing business volumes.
  • Interest Expense: A large amount of debt means that they have large interest payments, with interest rate increases eating into their profitability. Management has acknowledged that they need to control these variables.

  • Market Conditions: While they acknowledge they are resilient to economic downturns, management also acknowledges they are not immune to it. Management acknowledged they are seeing a softness in traffic for certain parts of the business.

    Understandability (1/5): The car wash business model is exceptionally simple. People want their cars clean, and they take it to a car wash. There’s nothing complex about that. MCW provides both full service and express options, and also unlimited memberships. The business is easy to understand.

    Balance Sheet Health (3/5): MCW’s balance sheet is fine. It has good current ratios and enough assets. While they do have very high debt levels, their consistent free cash flow gives them enough leeway to manage their debt. Their current debt is a potential area of risk if the debt becomes too large relative to their cash flow, however the management has expressed that they are actively managing this, by trying to pay off their debt faster.