Mister Car Wash’s 39.4% return over the past six months has outpaced the S&P 500 by 34.3%, and its stock price has climbed to $7.01 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Mister Car Wash, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Mister Car Wash Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than MCW and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
In addition to reported revenue, same-store sales are a useful data point for analyzing Consumer Discretionary - Specialized Consumer Services companies. 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 3% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, Mister Car Wash’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.5%, meaning it lit $2.50 of cash on fire for every $100 in revenue.
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 $1.77 billion of debt exceeds the $28.45 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $345.4 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 falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 14.7× forward P/E (or $7.01 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
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