EP78: Mini Me
Stock Ideas From Investment Professionals
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We’re back with another batch of investment ideas!
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This week, we’re excited to highlight 6 new ideas, including:
North America’s Leader in Portable Buildings: Discover why this company’s strong market position, extensive product offerings, and robust pricing power make it an attractive investment, with potential for significant revenue growth and resilience against economic shocks.
Spin-Off with Strong Management Values: Find out how this small cap, focused on fuel systems and aftermarket businesses, is poised for growth despite industry transitions, backed by a management team dedicated to economic value and free cash flow.
Innovative Construction Management Software Provider: Get insights into a leading software company serving the construction industry, with a large addressable market, competitive advantages, and a long runway for growth, benefiting from increased digitization and technology adoption.
Keep reading to learn more.
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Let’s get to it.
Silver Beech Capital discussed their new position in WillScot Mobile Mini (WSC). WillScot is a provider of portable and temporary buildings. Silver Beech estimates a fair value of 50% above today’s share price.
WillScot Mobile Mini (NASDAQ: “WSC”)
We recently initiated a new position in WillScot Mobile Mini (“WillScot”). WillScot is the leading North American provider of portable and turnkey modular building units and storage space. WillScot’s 156k modular units and 212k portable storage units are leased to a diverse 80k+ customer base across industrial, infrastructure, education, government, and natural resources users. WillScot’s modular products are depicted in Figure 2 below.
WillScot’s products are mission-critical and possess minimal technological or obsolescence risk. On a large construction site, project managers work in modular units where they update and store site-specific documents (work orders, safety reports, etc.). WillScot also offers customers an extensive array of value-added products and services (“VAPS”). These VAPS include unit furnishings, air conditioning, solar panels, restrooms, tech hardware, and many other add-ons. WillScot’s extensive offerings help fulfill a structural shift in customer demand for flexible modular and reduced waste/lower carbon footprint solutions.
We estimate that WillScot has over 50% market share in its core modular unit product offering. The company’s strong position in an oligopolistic market, combined with leading customer satisfaction and extensive VAPS, drives exceptional pricing power. Between 2019 and 2023, average rent per unit for WillScot’s modular fleet grew at a 16% CAGR2 , and this strong rent growth occurred as fleet utilization declined by 10% over the same period. It is exceedingly rare for a leased product to experience such exceptional pricing dynamics during a declining utilization environment.
Furthermore, based on our interviews with customers, we estimate that WillScot’s products average ~0.5% of total project costs. WillScot’s market presence, strong historical pricing power, and small but essential place in the value chain, give us confidence that the company’s favorable pricing dynamics are likely to continue.
We believe WillScot Mobile Mini is an attractive investment because:
High-quality business:
o Contracted, recurring revenues: WillScot’s products are leased to customers with an average lease duration of three years. Leases provide contracted, recurring revenues that are more resistant to economic shocks than speculative revenues.
o Embedded pricing power: Due to strong historical rent growth, there is a ~30% spread between market rents and in-place rents on WillScot’s modular fleet. Without any future market rent growth and by simply marking new leases to market rents, WillScot can raise revenues by about 10% per year over the next three years (assuming steady utilization rates).
o Leading market position: WillScot cemented its #1 market position via a strong track record of M&A. The company has 50%+ market share in the oligopolistic modular unit market. In addition, pending FTC approval, WillScot intends to acquire McGrath RentCorp, its largest competitor. If approved by the FTC, we believe the transaction will be very accretive.
o Small portion of value chain but mission critical: We estimate WillScot’s products account for an average of 0.5% of total project costs for any given customer.
o High returns on capital: In 2023, WillScot achieved a 19% after-tax return on tangible capital.3 Looking forward, WillScot’s capex-light VAPS penetration will continue to drive even stronger incremental returns.
Manageable economic risk: The market has recently discounted WillScot’s prospects as it fears a “higher for longer” interest rate environment will result in less construction activity and fewer housing starts. Indeed, these circumstances are negative for WillScot. However, we believe WillScot is relatively insulated from short-term economic weakness due to its three-year average lease duration contracted revenues. We find it more likely that utilization of WillScot’s products has troughed than peaked, as housing starts and remodeling projects resume at an accelerated pace to fill shortages caused by a decline in recent activity, in addition to infrastructure policy tailwinds.
Aligned management team: WillScot’s management is incented via an ROTC driven compensation structure and ownership of $200M+ shares. We have been impressed by management’s ability to “walk the talk.” Here is the company’s CEO on the recent earnings call: “We have internally generated cash flow and balance sheet capacity that we need to deploy as responsible stewards of shareholder capital. So, the share repurchase is absolutely a wonderful use of capital at these valuations, and we intend to continue that deployment.” Since WillScot’s IPO in 2017, this same management team has achieved a 24%+ total shareholder return CAGR.
Attractive valuation: WillScot trades at a TEV/EBITDA of ~11x (2023E) / ~10x (2024E) and ~7% free cash flow (“FCF”) yield (2024E). This valuation is too low for a dominant infrastructure services business with 40%+ EBITDA margins, predictably growing cash flows, and high returns. By comparison, the S&P 500’s industrial sector trades at a TEV/EBITDA of ~15x (2024E). We think WillScot’s intrinsic value per share is $60+, more than 50% higher than its current share price.
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