WillScot Mobile Mini Holdings Corp

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

WillScot Mobile Mini Holdings Corp. is a leading provider of modular space and portable storage solutions across North America and Europe, operating a business model focused on leasing rather than selling its core product.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

WillScot Mobile Mini Holdings Corp (WSC) operates in the modular space and portable storage solutions industry. They lease a range of products, such as:

Modular office space units, typically temporary buildings with varying customization options, including furniture, lighting, and climate control.
Portable storage units, which are highly durable containers used to store equipment, materials, and inventory, and come in many sizes and configurations.
VAPS which represents value added products and services: the company also offers various add-on services to their core product lines, including delivery, setup, maintenance, installation, and design.

The Company completed a merger with Mobile Mini, which increased WSC’s scale and market presence. The merger was announced in 2020 and closed in July 2020, forming today’s WillScot Mobile Mini Holdings Corporation.

Industry Trends and Competitive Landscape:

The modular space and portable storage industry is competitive but fragmented, with a mix of large national players and smaller regional operators. The demand for temporary space solutions is driven by various economic activities, including construction, infrastructure development, retail, government, healthcare, and education.

Market Fragmentation: While there are large players, the market is generally fragmented which implies opportunities for further consolidation and/or better competition among the key players.
Customer Concentration: WSC’s customer base is diversified but does have some customer concentration risk. The company’s top 10 customers represent less than 20% of total revenue.
Cyclicality: The Company’s business is susceptible to economic cycles.
Competition: Key competitors for WSC include companies like McGrath RentCorp, ModSpace, and Pac Van.
Pricing: The company has indicated that it will continue to take price, and will focus on long-term performance instead of short term volume.

What Makes WillScot Mobile Mini Different?

Scale: Being one of the largest players, WSC enjoys scale-based efficiencies, particularly in distribution, logistics, and procurement.
Geographic reach: They have a broad reach through its network of locations across North America and Europe.
Service and Support: They offer various add-on services like design and logistics on top of just the leases.
Diverse Business Portfolio: The different segments allow them to be resilient as some like Modular Space are more stable, while others like Storage tend to be more cyclical.

Financial Performance (based on the latest 10-Q for the three months ended 09/30/2024 and 2023 and 2023 10-K for year ending 2023)

Revenue: WSC’s quarterly revenue was $563.4 million (3 months ended 09/30/2024), increased by 11.4% over the same period a year ago. The overall year ended 2023 saw total revenue of $2,277 million, which is 12.4% growth YoY. This indicates positive trends for the business and its ability to generate increasing sales, but with a slowing YoY growth.
Operating Costs: In the three month ended 09/30/2024 the cost of goods sold or renting was $312.9, a 13.3% increase YoY. Overall expenses for the full year ending 2023 were $1,067.3 million which is a 12.5% increase compared to 2022.
Net Income: Net income for the quarter is $79.4 million (2024), representing a 7.3% increase year over year. Full year net income was $409.2 million in 2023.
Adjusted EBITDA: For the quarter ended 09/30/2024, WSC’s adjusted EBITDA was $246 million, showing a growth of 1.7% YoY. Full year adjusted EBITDA for 2023 was $948.8 million, a growth of 1.9% over 2022. This shows the company’s ability to make profit from its operations, even with increased expense.
Free Cash Flow: The company’s free cash flow (FCF) has increased to $193 million in the three months ended 09/30/2024 from $147 million in the same period of 2023. FCF for the year was reported as 404.2 million.
Liquidity and Capital Resources: The Company’s liquidity position has remained strong, with $567.1 million in cash and cash equivalents, total debt of $4.8 billion. This has put the leverage ratio as 3.7x, below the company’s target of under 4x.
Operating Margin: Overall operating margin has remained strong at about 21%.
Debt: There is considerable debt at $4.8 billion. But the net leverage is around 3.7x.
CAPEX: CAPEX for 2024 is forecasted to be around $230 million, which includes spending for growth and maintenance. For 2023 CAPEX was $275 million, showing a decrease for 2024.
Book Value: The book value was $2.75 billion as of December 31, 2023.

Moat Rating: 3/5

WSC possesses a narrow, but solid economic moat, driven primarily by a combination of size, location and scale-based cost advantages, as well as some switching costs. Here’s a detailed breakdown:

Size and Scale: The most important part of WSC’s moat is size and scale. Being a leader in North America and also a strong player in Europe enables them to negotiate prices from manufacturers and vendors. WSC is also capable of providing economies of scale, due to having many locations. While scale-based economies are often not seen to be moats, the scale in this industry is a very strong advantage and hard to overcome.
Location-Based Moat: With their highly distributed network of branches, WSC has built up location as a competitive advantage, as transportation costs make serving a certain local area more profitable than farther distances.
Switching Costs: The longer that a customer uses WSC for its storage or modular building purposes, the higher the switching costs become. For example it’s harder for a customer who has many data in software to move to a new company, or for a customer who has a lease term which has years left. This enables WSC to lock in customers for long periods.
Not a Wide Moat: The network effects are absent in this business, meaning it does not benefit from new users coming into the business. Additionally, while barriers to entry are high, this is also a fairly mature market and there are still a number of strong competitors. Competitors could copy their processes in time to come close to WSC’s profitability, limiting the pricing power and excess ROIC.

Risks to the Moat and Business Resilience:

Economic Downturn: As a cyclical business, WSC is sensitive to changes in the overall economy. A downturn could reduce construction and other activities, which would hurt the demand for space solutions. The company is able to mitigate some of this risk with their diversified portfolio of markets, however, it’s still something investors should be aware of.
Competition: The industry is competitive and fragmented, and an increase in competition could erode WSC’s margins if they are forced to lower prices.
Price Risk: The company’s prices are subject to external factors like inflation and the rising price of materials, increasing operating costs which could lower margins if WSC is unable to pass costs to customers.
Interest Rate Risk: With a high degree of leverage, if interest rates continue to rise the cost of debt is increased substantially which could erode profits and require changes to the financial structure.
Acquisition Risk: As WSC has grown through numerous acquisitions it’s important to recognize that integrating these businesses can be a complex process, and poor planning may impact its financial performance if synergies are not achieved, or if companies do not fit with the portfolio.
Technological Obsolescence: Technological innovation may render the company’s equipment or manufacturing processes obsolete, leading to loss of competitive edge in their product offerings.
Labor and Supply Chain Issues: Labor and supply chain costs in the areas where the company operates could increase, resulting in losses.

Business Resilience: Despite the risks mentioned above, WSC’s business model shows strong resilience for a few reasons:

Diversified Portfolio: WSC operates across many geographies and industries, decreasing reliance on certain markets and customers. This also means it is not dependent on one type of economic activity.
Lease-Based Revenue Model: A strong lease-based model provides recurring revenue which is far more predictable than other business models.
Scale and Market Leadership: WSC is a leader in its area of business. Due to scale it can provide more consistent returns.

Understandability Rating: 3/5

The business model is relatively straightforward, which is essentially renting out portable storage units and modular spaces, and providing related services. While the operations are simple to understand, WSC’s multiple product lines and geographic regions creates some complexity for analysis. Furthermore, the financial analysis is a bit harder, requiring knowledge about ROIC and CAPEX. So, it’s not the easiest but not the most difficult either to understand.

Balance Sheet Health: 4/5

Debt: The company has a high level of debt which is 3.7 times its EBITDA. This is a big area for concern and can cause distress during times of crisis, though current operations have been strong.
Cash: WSC’s cash balance has increased to $567 million, which is helpful for dealing with debts.
Liquidity: Overall liquidity is deemed to be at an adequate level to deal with short and long term commitments.
Stability: The historical performance of the company has been great for years. They have a long history of growth, and with the recent merger a solid balance sheet has been created, with long-term stability and growth in mind.

Recent Concerns / Controversies and Problems Faced WillScot Mobile Mini has not been immune to macroeconomic changes. The management has discussed that they are still facing some volatility, uncertainty, and cost pressures. In the most recent quarter earnings, there was a slight decline in profitability. The company is now looking into implementing changes to boost its margins. While demand still remains high, any downturns can cause serious losses due to large fixed expenses.

Additionally, they have not been immune to accounting issues. The SEC issued an accounting notice in response to accounting standards that would impact companies that lease assets, they have stated that this change will not significantly impact their financials.