Wells Fargo says buy the stock of this car wash chain that has 30% upside

Mister Car Wash stock could soar as the company increases the number of its locations and exercises pricing power, according to Wells Fargo. Shares of the car wash company have rallied 63% from October 2023, but Wells Fargo analyst David Lantz still believes the stock offers investors a "solid entry point with top line levers, reasonable FY24 expectations & share gain opportunities," he wrote in a report Wednesday.

Lantz initiated coverage of Mister Car Wash at an overweight rating, setting a price target of $11. That implies that the stock could still rally another 30% from its Tuesday close of $8.45. MCW 3M mountain MCW 3 month range The analyst underscored the company's Unlimited Wash Club (UWC) subscription membership as a consistent revenue stream that reduces seasonality and weather related headwinds.

"UWC drives the lifetime value of the typical customer significantly higher," he wrote. "Given the estimated ~$240+ difference in annualized car wash spend between UWC members and retail customers, this implies every 35K additional retail customers that enroll in the UWC membership program provides a 100bps+ annualized sales lift." Lantz also pointed to Mister Car Wash's Titanium 360° pilot wash program as an additional catalyst.

He believes the program could reach 10%+ penetration within a year of implementation, driving up the company's profit margins. Additionally, the analyst sees a strong runway for the chain's unit growth. "MCW sees opportunity to double its footprint in its current backyard before needing to move into new white space," he wrote.

"Bigger picture, MCW has a strong development pipeline (typically an 18 month process between site selection and opening day), putting it on its way to reaching its 1,000+ LT car wash target." Lantz added that Mister Car Wash makes a strong effort to integrate all acquired car washes into its operating system and brand.

While a lengthy process, the analyst believes that creating a consistent customer experience will ultimately provide it with a competitive advantage. Another catalyst is Mister Car Wash's strong focus on acquiring retail customers through increased marketing efforts and the rollout of its mobile app.

Lantz also highlighted the company's pricing power as another tool that could propel growth. Mister Car Wash has traditionally lagged peers with its prices, although it followed industry wide price increases with two of its own in recent years. "We believe MCW is appropriately priced and aren't anticipating another increase NT, but we believe additional pricing power exists," Lantz wrote.

"Further, while MCW has yet to take a price increase on the UWC side of the business, we believe this could be another growth lever over time." — CNBC's Michael Bloom contributed to this report..