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WillScot Mobile Mini (WSC) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Temporary space provider WillScot (NASDAQ:WSC) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 3.8% year on year to $587.2 million. The company's full-year revenue guidance of $2.56 billion at the midpoint also came in slightly above analysts' estimates. It made a non-GAAP profit of $0.35 per share, down from its profit of $0.65 per share in the same quarter last year.

WillScot Mobile Mini (WSC) Q1 CY2024 Highlights:

  • Revenue: $587.2 million vs analyst estimates of $580.9 million (1.1% beat)
  • EPS (non-GAAP): $0.35 vs analyst expectations of $0.35 (in line)
  • The company reconfirmed its revenue guidance for the full year of $2.56 billion at the midpoint
  • EBITDA Guidance for the full year is $1.16 million at the midpoint, below analyst estimates of $1.15 billion
  • Gross Margin (GAAP): 66.7%, up from 57.1% in the same quarter last year
  • Free Cash Flow of $143.9 million, down 13.5% from the previous quarter
  • Market Capitalization: $7.41 billion

Originally focusing on mobile offices for construction sites, WillScot (NASDAQ:WSC) provides ready-to-use temporary spaces, largely for longer-term lease.

The company was founded in 1955 when Albert Vaughn “A.V.” Williams patented the technology for building mobile offices. Today, WillScot provides customers with modular office complexes, mobile offices and classrooms, portable restrooms, portable storage containers, fixed-in-place climate control storage units, and large hanger-like metal overhead tent structures. Other specialized solutions consist of blast-resistant modules that protect against petrochemicals and other harmful substances.

WillScot's customers span many industries and end markets such as construction, education, healthcare, and retail organizations What unites them is the desire to outsource and the need for flexibility. Rather than spend time and capex dollars to construct a permanent facility that you may outgrow or that may be obsolete in a short period of time, a customer can outsource this pain point to WillScot. This is similar to how enterprises used to erect on-premise, dedicated corporate data centers but are now increasingly outsourcing this to companies such as Amazon AWS and Microsoft Azure.

WillScot generates revenue by leasing its modular spaces and portable storage units. Many of these lease agreements are multi-year in nature, which means the company isn't subject to violent swings in demand. It also sells its products on a one-off basis, but the recurring rental income it generates through leasing is its main source of revenue. The company's customers consist of construction, education, healthcare, and retail organizations.

Construction and Maintenance Services

Construction and maintenance services companies not only boast technical know-how in specialized areas but also may hold special licenses and permits. Those who work in more regulated areas can enjoy more predictable revenue streams - for example, fire escapes need to be inspected every five years–. More recently, services to address energy efficiency and labor availability are also creating incremental demand. But like the broader industrials sector, construction and maintenance services companies are at the whim of economic cycles as external factors like interest rates can greatly impact the new construction that drives incremental demand for these companies’ offerings.

Competitors in the modular space and portable storage industry include Mobile Modular Management (NASDAQ:MGRC), and private companies Modular Space, AKA ModSpace, and Pac-Van.

Sales Growth

Reviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. WillScot Mobile Mini's sales grew at an incredible 22.4% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows WillScot Mobile Mini's offerings resonate with customers, hinting that it could be a high-quality business.

WillScot Mobile Mini Total Revenue

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on new catalysts such as a contract win or a successful product line. WillScot Mobile Mini's annualized revenue growth of 11.5% over the last two years is below its five-year trend, but we still think the results were good and suggest demand was strong.

We can dig further into the company's revenue dynamics by analyzing its most important segments, Leasing and Delivery and Installation, which are 78.4% and 17.1% of revenue. Over the last two years, WillScot Mobile Mini's Leasing revenue (recurring) averaged 16.1% year-on-year growth while its Delivery and Installation revenue (non-recurring) averaged 11.2% growth.

This quarter, WillScot Mobile Mini reported reasonable year-on-year revenue growth of 3.8%, and its $587.2 million of revenue topped Wall Street's estimates by 1.1%. Looking ahead, Wall Street expects sales to grow 8.5% over the next 12 months, an acceleration from this quarter.

Gross Margin & Pricing Power

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

WillScot Mobile Mini has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development to stay one step ahead of the competition. Its margin also signals it sells differentiated products, not commodities. As you can see below, it's averaged an exceptional 53.9% gross margin over the last five years. That means WillScot Mobile Mini only had to pay its suppliers $46.06 for every $100 in revenue to provide its products and services.

WillScot Mobile Mini Gross Margin

WillScot Mobile Mini's gross profit margin came in at 66.7% this quarter, marking a 9.6 percentage point increase from 57.1% in the same quarter last year. Zooming out, WillScot Mobile Mini's margin has trended up over the last 12 months, increasing by 4 percentage points year on year. If this trend continues, it could suggest better unit economics and more leverage on the fixed portion of its cost of goods sold.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

WillScot Mobile Mini has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 21.4%. This isn't surprising as its high gross margin gives it a favorable starting point for ultimate operating profitability.

Analyzing the trend in its profitability, WillScot Mobile Mini's annual operating margin rose by 15.9 percentage points over the last five years, showing its efficiency has significantly improved.

WillScot Mobile Mini Operating Margin (GAAP)

In Q1, WillScot Mobile Mini generated an operating profit margin of 22.1%, down 4.7 percentage points year on year. Conversely, the company's revenue and gross margin actually rose, so we can assume it was recently less efficient because its general expenses (sales and marketing, administrative overhead) grew faster than its revenue.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

WillScot Mobile Mini's full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it's at an inflection point.

WillScot Mobile Mini EPS (Adjusted)

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. WillScot Mobile Mini's EPS grew at an astounding 39.3% compounded annual growth rate over the last two years, higher than its 11.5% annualized revenue growth. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.

Diving into WillScot Mobile Mini's quality of earnings can give us a better understanding of its performance. A two-year view shows that WillScot Mobile Mini has repurchased its stock, shrinking its share count by 15.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, WillScot Mobile Mini reported EPS at $0.35, down from $0.65 in the same quarter last year. Despite falling year on year, this print beat analysts' estimates by 1.6%. Over the next 12 months, Wall Street expects WillScot Mobile Mini to grow its earnings. Analysts are projecting its EPS of $1.73 in the last year to climb by 24.1% to $2.15.

Cash Is King

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.

WillScot Mobile Mini has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a cash cushion. The company's free cash flow margin has been among the best in the industrials sector, averaging 17% over the last five years.

Taking a step back, we can see that WillScot Mobile Mini's margin expanded by 20.8 percentage points during that time. This is encouraging because it gives the company more ways to win.

WillScot Mobile Mini Free Cash Flow Margin

WillScot Mobile Mini's free cash flow clocked in at $143.9 million in Q1, equivalent to a 24.5% margin. This quarter's result was good as its margin was 6.3 percentage points higher than in the same quarter last year, but we wouldn't read too much into it because working capital needs can be seasonal and cause quarter-to-quarter swings in the short term.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Although WillScot Mobile Mini has shown solid business quality lately, it historically did a mediocre job investing in profitable business initiatives. Its five-year average ROIC was 8.5%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

WillScot Mobile Mini Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, WillScot Mobile Mini's ROIC averaged 4.7 percentage point increases each year. The company's rising ROIC is a good sign and could suggest its competitive advantage or profitable business opportunities are expanding.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

WillScot Mobile Mini reported $13.15 million of cash and $3.74 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.06 billion of EBITDA over the last 12 months, we view WillScot Mobile Mini's 3.5x net-debt-to-EBITDA ratio as safe. We also see its $160.2 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from WillScot Mobile Mini's Q1 Results

It was good to see WillScot Mobile Mini beat analysts' revenue expectations this quarter. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. On the other hand, its EBITDA forecast for the full year missed and its operating margin fell short of Wall Street's estimates. Overall, the results could have been better. The stock is flat after reporting and currently trades at $38.93 per share.

Is Now The Time?

WillScot Mobile Mini may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

There are numerous reasons why we think WillScot Mobile Mini is one of the best industrials companies out there. For starters, its revenue growth has been exceptional over the last five years. On top of that, its impressive gross margins indicate the mission-critical nature of its products, and its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

WillScot Mobile Mini's price-to-earnings ratio based on the next 12 months is 18.1x. Looking at the industrials landscape today, WillScot Mobile Mini's qualities really stand out and we like it at this price. We believe this is a high-quality company worthy of an investment.

Wall Street analysts covering the company had a one-year price target of $52.40 right before these results (compared to the current share price of $38.93), implying they saw upside in buying WillScot Mobile Mini in the short term.

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