Over the past six months, Mister Car Wash’s shares (currently trading at $5.83) have posted a disappointing 7.5% loss, well below the S&P 500’s 10.1% gain. This might have investors contemplating their next move.
Is now the time to buy Mister Car Wash, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Mister Car Wash Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why MCW doesn't excite us and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Investors interested in Specialized Consumer Services companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Mister Car Wash’s underlying demand characteristics.
Over the last two years, Mister Car Wash’s same-store sales averaged 2.9% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
2. New Investments Bear Fruit as ROIC Jumps
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Mister Car Wash’s ROIC increased by 3.2 percentage points annually over the last few years. This is a good sign, and we hope the company can continue improving.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Mister Car Wash’s $1.76 billion of debt exceeds the $35.65 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $337.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Mister Car Wash could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Mister Car Wash can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Mister Car Wash doesn’t pass our quality test. After the recent drawdown, the stock trades at 12× forward P/E (or $5.83 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
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