Description

THE BUSINESS MODEL

MCW has the leading market share in the express coveyer belt car wash market. Conveyer belt car washes sit in the middle of the market and are offer convenience, speed, quality and a cheap price for subscribers. The low end of the market are the self serve car washes that give you soap and a hose. they typically cost $3-5 per wash. the high end is hand washed which is typically $30 and 30 minutes. Conveyer belts usually charge $10 and the process takes less than 5 minutes. It is similar to automatic bay car washes where you slowly drive your car through a tunnel without a conveyer belt, which charge roughly $8. The margincal cost of a wash is $2.50 and so the industry moved to a subscription model where for $20 a month you get an unlimited number of washes. this makes the business less cyclical and generates higher ROI.

TAM

There are over 60k car washes in the US averaging $200k per location for a roughly $12bn TAM. Most are low end. The automatic bay and conveyer belt model consists of about 10k locations, ~6.5k automatic bay plus 3.5k express. automatic bay washes average around $250k per store while express washes average over $1.5M.

The unlimited wash subscriber model offers customers the most value and is taking market share. The express model has the highest ROI. It's likely that the express model overtakes the automatic bay model and also pulls market share from the higher end and lower end models due to its subscription model that those other segments cannot offer. 

it's conceivable that the 3.5k express car washes grow to 7k over time as they create the most value and expand the market. the average person washes their car once every month. But the average express wash subscriber washes it every week, 4x a month. that drives their cost per wash down to $5, comparable to the higher end of DIY car wash. Instead of spending $10 a month for 1 wash, the average sub spends $20 a month for 4 washes.

COMPETITIVE ADVANTAGE AND MARKET SHARE

The main competitive advantage MCW has is its ability to sell subscriptions and offer high quality service with a smile. They have the best training in the industry and specifcially train and optimize operations to sell subscriptions. MCW averages 4,565 subs per car wash compared with 1,750 for DRVN brands. My research suggests express washes rarely exceed 3k subs per car wash. this gives MCW a significant competitive advantage and materially higher unit economics.

The other competitive advantage is their local network effect. While fewer than 40% of subs use more than one location, it is a selling point that makes it easier to sell subscriptions. They are always one of the top 3 car wash brands in a city, often #1.

The result is there is a significant barrier to entry in most local markets. A market can support one car wash per 20k to 40k people. the variance is mostly due to weather - some locations create a lot of dirt that results in more frequent washing. I estimate that 5-10% of MCW cities are monopolies where there is no room for anyone to enter and build more than 1 location. another 60% are oligopolies where there are usually 3 players that now dominate the market. 

UNIT ECONOMICS

Current unit economics suggest an ROIC in the low 20s, after tax and after all corporate overhead. The main risk is the ROI for the industry is good and is attracting new supply, which could result in worse unit economics. I model out what I think the typical mid sized player's unit economics are, set it to MSD in a bear case and low teens in a base case - the main driver being # of subs and ASP. then I take those assumptions and apply them to MCW's unit economics. My bear case is that ROIC for MCW ends up at 12.5% after tax and all overhead. I don't think this is likely as some cities will end monopolies and most will end up oligopolies.  My base case is 28% ROIC. I should note that my ROIC calculates assumes the locations are leased and not owned. My estimate is that MCW has a 15% ROIC advantage v a mid sized player.

ROLLUP OPPORTUNITY

Unfortunately, due to low rates and attractive ROI there was a flood of capital entering the express segment since 2020. That is not cooling off but this does limit the M&A opportunity.

Due to competition, My estimate is that on small deals they get a 14% ROIC and 7% on big deals ($274M clean streak FLA deal in Q4 2021). 

The focus is almost entirely on organic growth, which offers the highest ROI, until competition for M&A subsides.

My base case is the company can spend around $70M a year the next few years at 10% ROIC and then in the long run $150M a year at 8.5% ROIC, assuming a 6.5% cost of debt. M&A is helpful for the share price but not a massive help unless entrants give up due to poor execution or a recession.

TARGET PRICE

I see a clear path to over $1 in EPS over 4-5 years with > 10% EPS growth for several years thereafter. I end up with a 4 year target price of $22.50 a share.

RISKS

By far the biggest risk is competitive entry. This has already all but dried up M&A. 

You can find the top 100 retailers here

https://cptop100.com/

DRVN is a strong #2. Their unit economics are not as good, due to worse site selection, fewer subs per location and fragmented brands (they are fixing this last point and rebranding under Take 5). 

Zips has 300 locations, quick quack 200 and then #5 through 10 have between 100 and 150 each compared with 443 for MCW and 405 for DRVN.

The market is very fragmented relative to 3.5k+ toal express washes and 10k including automatic bay.

Over the last year the biggest unit growers are DRVN at 100, spotless at 73, club at 70, zips at 65, Then MCW at 47. The faster growers are relying more on M&A.

The positive is that no one runs car washes as well as MCW except onew midwestern chain that grows very slowly in order to control execution and get A+ real estate. And because ROI on M&A is low, the incremental cash flow provided by M&A isn't much and doesn't help acquirers grow organically very much. ie M&A doesn't make the competition much stronger.

Another rivalry risk is if two large rivals merge resulting in dominant positions in many local markets. 

Recession is also a risk but the business model is fairly resilient.

Poor capital allocation is not a risk, the company has shown discipline.

If I am wrong on the unit economics of mid size players then my unit economic forecasts are too high. if the ROI gap between MCW and a mid sized player is not 15% but 5-10% then MCW's ROI would fall accordingly in the markets where mid size players have an impact.

Catalyst

EPS