Why Mister’s car wash stock collapsed after its first earnings report

On August 12, Mr. car wash (NYSE: MCW) released its first quarterly earnings report since its initial public offering (IPO). For the period covering the second quarter of 2021, it reported higher revenue, comparable sales growth and positive adjusted earnings per share.

These successes look set to cause a stir in the stock market, but in response to the report, the company’s shares plunged, then continued to fall more slowly until the following week. Finding out why the market doubts the car wash company, a closer look at its fundamentals reveals what could be the real reason for this seemingly bearish sentiment.

Winning indicators for the company’s first public report

A quick glance at Mister Car Wash‘s very first earnings report as a publicly traded company plunges its stock market after the release seems illogical. The company achieved what can only be considered positive results.

It describes itself as the largest car wash chain in the United States with a presence in 21 states and 351 total locations, and its revenues set a second quarter record after hitting 93% year-on-year. other, at $ 197.1 million. Revenue also jumped 25% from the pre-pandemic second quarter of 2019. Adjusted earnings per share fell from breakeven in the same quarter in 2020 to $ 0.14 in 2021.

Both net revenue and roster for 2021 were up from the first six months of 2019. Mister Car Wash also provided guidance for the year 2021, forecasting 30% net revenue growth, an increase from 29% to 33% of compounding, and adjusted EPS from $ 0.39 to $ 0.44 per share.

Image source: Getty Images.

During the second quarter earnings conference call, CEO John Lai said the company is still working “to build a truly national car wash business and scale it to even higher heights,” adding that “a strong culture drives strong performance, and we run currently at a high level and clicking all cylinders. ” He went on to describe how Mister Car Wash’s subscription model has built a base of 1.5 million members and that the company has generated 39 consecutive quarters of positive same-store sales growth before COVID, as she was still private.

Why, then, did the action take a nosedive after the report? The answer lies in its current assessment.

Assessment versus reality

Mister Car Wash’s case makes it appear that at least some post-foreclosure IPOs may be similar to meme shares, just with a different set of investors. Two of the most famous memes stocks (GameStop and movie company AMC Entertainment Holdings) saw their shares jump dramatically earlier this year thanks to the actions of millions of retail investors coordinating on the WallStreetBets Reddit sub-forum.

Calling himself “monkeys” after the Planet of the Apes the army which says it is stronger together, these retail investors have inflated the stock prices of these two companies which were previously falling towards bankruptcy. The enthusiasm of retail investors has led them to bid on stocks up to surprising multiples of previous prices, effectively decoupling the share of actual performance from GameStop or AMC, which before the Reddit-induced short squeeze has seen declining incomes, growing debt and a slide into possible failure for years.

It almost seems that institutional investors are now treating IPOs the same way the “monkeys” of WallStreetBets treat GameStop and AMC, offering their valuation based on the speculative frenzy and enthusiasm following the withdrawal of COVID, rather than assessing them based on the actual performance of the underlying businesses. An example is Lordstown Engines, which debuted on the stock exchange with funding of $ 675 million although it did not have a fully functional prototype at the time of its IPO, nor any actual production of vehicles.

Other examples of overheated investor enthusiasm followed by a return to a bit colder reality include the cryptocurrency exchange Coinbase, whose stock was launched at $ 381 per share, giving the company a princely valuation of $ 85 billion, but has since seen its value drop to around $ 250 to $ 260 per share, and an artificial intelligence company C3.ai, which investors caught up in the late 2020 IPO frenzy up to $ 161 in December and back to nearly $ 169 in February 2021, before falling to the rough range of $ 45 at $ 55 which it has been trading for over a month.

Immediately after its initial public offering in June, carried out without a merger with a SPAC (ad hoc acquisition company), Mister Car Wash is worth over $ 6 billion. Its market cap is still $ 5.9 billion after the stock has lost more than 10% of its value in the last five trading days at the time of writing, placing its valuation somewhere in the market. same stage as the ATV and snowmobile manufacturer. Bombardier Recreational Products, motorcycle manufacturer Harley davidson, or chain of stores Macy’s.

The fact that this is a high valuation for a car wash chain is further evidenced by its leakage P / E ratio. As of mid-August, its P / E ratio was around 76.4, meaning investors pay $ 76.40 for every $ 1 in profit generated.

Listed car wash companies are rare. But comparisons with the P / E ratios of companies in adjacent industries, such as auto parts sellers Automatic zone, with its P / E of 17.8, or O’Reilly Automotive with a P / E of 21.5 and a chain of gas stations and convenience stores Casey’s General Stores at a P / E of 23.7 – suggest Mister Car Wash may be overrated.

Other auto service companies seem to have a P / E between 18 and 25. Even taking the upper end of that range as a reasonable estimate, Mister Car Wash appears to be roughly 3 times overvalued, which means may – be priced at $ 6 per share. would more accurately reflect its value and performance than the current $ 18. That might be a bit low considering its growth, but it still highlights the stock’s likely overvaluation.

Mister Car Wash is clearly profitable and growing, but the value of its share is probably too high in the context of the automotive service industry. The fools who invest in auto stocks Where retail stocks related to cars have many other options as the market correction occurs and the company’s stock price seeks and ultimately finds a more realistic equilibrium.

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Rhian hunt has no position in any of the stocks mentioned. The Motley Fool owns stock and recommends C3.ai, Inc. The Motley Fool recommends Caseys General Stores. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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