Willscot Holdings Corporation (WSC)
Steady Free Cashflow in all Cycles
Dear Valued Readers,
After a hiatus in our publishing schedule since 2023, we wanted to take a moment to reconnect with you and explain our absence. Through Black Opal Research, we always aimed to share our thoughts on businesses that are easy to understand that have what we think is a competitive advantage in the markets in which they operate.
In the past year, we found ourselves in a market environment where businesses trading near our entry points became increasingly scarce. Rather than compromise our standards or publish analyses of businesses that didn't fully convince us, we chose to pause our regular communications.
During this time, we continued monitoring the markets and examining various businesses. Our approach remains the same: we only want to share thoughts on companies we find interesting that align with our event driven investment perspective and are near our calculated entry point.
Today, we are returning with an analysis of WSC. We currently hold a small position @ ~$35.00 and expect to add more on the way down.
Thank you for your patience and continued interest in this newsletter. We look forward to sharing more businesses with you in the future and welcome your thoughts and feedback.
Disclaimer
Black Opal Research is a financial newsletter that provides analysis and opinions on publicly traded businesses. Our content is intended solely for informational and educational purposes. We share our perspectives to invite discussion, test our investment theses, and hold ourselves accountable for our own investment decisions.
Nothing in our articles should be interpreted as financial, investment, legal, or tax advice. We do not provide personalized investment recommendations, nor do we manage money for others. Investing involves risks, and past performance is not indicative of future results. Readers should conduct their own research, verify facts independently, and consult a qualified financial professional before making any investment decisions.
WillScot Holdings Corporation (WSC) Analysis
Summary
Management
Experienced team focused on operational excellence
Disciplined capital allocation with 20%+ IRR targets on new units
Track record of successful acquisitions and integrations
Long-term oriented growth strategy balancing organic expansion and M&A
Competitive Advantage
North America's leading provider of modular space solutions
Extensive branch network with unparalleled geographic coverage
Value-Added Products (VAPS) creating differentiated turnkey solutions
Highly diversified customer base spanning multiple industries
Asset-light business model with strong recurring revenue
Margin of Safety Price Point
Ten Cap Entry: $32.00
Current Stock Price: ~$30.00
The Company
WillScot Holdings Corporation is North America's leading provider of innovative flexible turnkey space solutions. The company offers a comprehensive selection of modular space and portable storage products including modular office complexes, mobile offices, classrooms, blast-resistant modules, clearspan structures, sanitation solutions, portable storage containers, and climate-controlled containers and trailers. With operations primarily in the United States, Canada, and Mexico, WillScot operates approximately 260 branch locations and services a diverse customer base of over 85,000 customers spanning multiple industries.
What sets WillScot apart is their approach to creating "turnkey" solutions. Beyond just providing space, they offer a thoughtfully curated selection of Value-Added Products (VAPS) that make their modular spaces more productive, comfortable, and secure. These include workstations, furniture, appliances, power solutions, security systems, steps and ramps, and other amenities that allow customers to immediately utilize their temporary space from day one - or as WillScot puts it, "Right from the Start."
The Story
WillScot's business model centers around providing essential infrastructure for customers across various industries when they need temporary space solutions. Their focus on leasing (versus selling) creates a highly predictable recurring revenue stream, with average lease durations of approximately 41 months. The company's operations are remarkably resilient through economic cycles, as their diverse customer base provides natural hedging against sectoral downturns.
What makes WillScot's business particularly attractive are three key elements that drive its exceptional unit economics:
1. Long-Lived, Reusable Assets with Low Maintenance Requirements: WillScot's modular units have incredibly long economic lives, typically exceeding 20 years. Through relatively low-cost refurbishment activities, the company extends these useful lives even further, enhancing the return on their initial capital investment. This refurbishment approach, rather than frequent replacement, creates significant capital efficiency, especially considering the units retain average residual values exceeding 50%.
2. Value-Added Products and Services (VAPS): Beyond the base rental units, WillScot has mastered the art of enhancing revenue through their VAPS offerings. This "razor and blade" model has been a substantial growth driver, allowing them to increase revenue per unit significantly without comparable increases in capital expenditure. VAPS penetration continues to grow and contributes meaningfully to margins.
3. Pricing Power and Diversification: WillScot continually demonstrates strong pricing power, with modular space average monthly rental rates increasing 7.8% year-over-year in 2024. This pricing strength, combined with their diverse customer base where no single customer represents more than 2% of revenue, provides stability and growth even in challenging economic conditions.
Management has consistently demonstrated discipline in capital allocation, targeting minimum internal rates of return (IRR) of 20% on new units purchased or built. This focus on returns rather than merely growth for growth's sake has allowed WillScot to build a highly profitable business that generates substantial free cash flow.
Looking forward, several trends support WillScot's continued growth:
Industrial Reshoring: As manufacturing returns to North America, demand for modular solutions during construction and ongoing operations will increase.
Disaster Recovery: Increasing frequency and severity of climate-related events create demand for rapid deployment of temporary infrastructure.
Commercial Renovation: Ongoing modernization and renovation of commercial spaces, including retail, create consistent demand for temporary modular solutions.
WillScot has proven adept at both organic growth and expansion through acquisitions. Since 2017, they've executed 36 acquisitions totaling approximately $4.7 billion in enterprise value, including transformative deals like Mobile Mini and continual tuck-in acquisitions of regional players. In 2023-2024 alone, they expanded into adjacent product categories including climate-controlled storage, clearspan structures, and perimeter solutions, broadening their addressable market.
The Evaluation
10 Cap Evaluation
At Black Opal, we value businesses as if we were going to buy the entire thing. Our Ten Cap analysis ensures that if we purchased the whole business, we would get a return of our entire initial investment over a ten-year period. This analysis does not include growth metrics and assumes that the business will be steady over time.
In 2024, WillScot generated operating cash flow of $561.6 million. According to the 10-K, the company spent $280.9 million on purchase of rental equipment and refurbishments, and an additional $18.4 million on purchase of property, plant and equipment, for a total of $299.3 million in organic capital expenditures. The company separately spent $121.2 million on acquisitions, which we don't include in our maintenance capex calculation as these represent growth investments rather than maintenance of the existing business.
WillScot's reported income tax expense for 2024 was abnormally low at $8.5 million due to the one-time expenses affecting pre-tax income. Looking at previous years (2023: $126.6 million; 2022: $88.9 million), a more normalized tax expense would be approximately $100 million. We'll adjust our owner earnings calculation accordingly:
$561.6m - $299.3m + $100m = $362.3m in base owner earnings
However, this still significantly understates WillScot's true earnings power due to substantial one-time expenses in 2024. As clearly detailed in the 10-K, operating cash flow was directly reduced by $225.7 million for the McGrath termination fee ($180 million) and related transaction costs ($45.7 million). Adding back just these transaction-related charges:
$362.3m + $225.7m = $588.0m in normalized owner earnings
The company also incurred other significant one-time expenses including a $132.5 million non-cash impairment charge related to the Mobile Mini trade name and $8.6 million in restructuring costs. While these didn't directly impact operating cash flow in the same way, they reflect additional normalization factors when assessing the company's true earnings power.
Shares outstanding: 183.6 million
$588.0m / 183.6 million = $3.20/share
Over ten years, our adjusted purchase price would be $32.00/share, representing a more accurate depiction of the company's ordinary earnings power. This is our Ten Cap entry price, which would ensure that the owner earnings generated by the company in its current form, even in a challenging market, would return our entire investment over a 10-year time horizon.
For WillScot, we believe the Ten Cap approach is particularly appropriate as it acknowledges the company's current position as the dominant player in its market. While the company has historically grown through acquisitions, its size now limits the impact of tuck-in acquisitions within its core market. Future growth will likely require expansion into adjacent segments where margins and returns may differ from historical patterns. The Ten Cap approach allows us to value the business based on its current earnings power without making assumptions about growth rates that may not materialize in the future.
Current Opportunity
WillScot shares are currently trading around $29.76, which is below our Ten Cap entry price of $32.00. This current price level represents a recent decline that may provide an attractive entry point. Several temporary factors have contributed to the stock's weakness:
Failed McGrath Acquisition: In September 2024, WillScot and McGrath RentCorp mutually agreed to terminate their merger agreement due to regulatory concerns. This resulted in WillScot paying a $180 million termination fee and incurring approximately $42.4 million in related transaction costs. While significant, these are one-time expenses that don't impact the company's long-term earnings power.
Rebranding and Goodwill Impairment: In 2024, WillScot executed a rebranding strategy, discontinuing the Mobile Mini brand name. This led to a non-cash impairment charge of $132.5 million related to the Mobile Mini trade name. Again, this is a non-recurring item that doesn't reflect the underlying business strength.
Restructuring Expenses: The company implemented a cost-reduction plan in June 2024, resulting in $8.6 million in restructuring expenses. These changes are expected to drive operational efficiencies going forward.
Cyclical Headwinds: The company has experienced some cyclical softness due to reduced non-residential construction starts caused by higher interest rates. This has resulted in lower demand and decreased units on rent in 2024. However, this is a cyclical rather than structural issue, and we expect demand to recover as interest rates normalize.
Looking past these temporary headwinds, WillScot's core business remains strong. The company continues to generate substantial free cash flow, which it has deployed to repurchase shares (reducing outstanding shares by 7.1 million in 2024 alone) and make strategic acquisitions to expand its product offerings.
While WillScot's position as the dominant player in its core market limits its ability to continue its historical acquisition-driven growth within that space, the company has demonstrated an ability to expand into adjacent product categories. Recent acquisitions in climate-controlled storage, clearspan structures, and perimeter solutions represent efforts to broaden the company's addressable market. These moves should allow WillScot to leverage its existing customer relationships, branch network, and operational expertise into new revenue streams.
With the stock now trading below our Ten Cap entry price, we believe this represents a reasonable entry point to begin establishing a position. The current price of $29.76 implies a multiple of just 9.3x our normalized owner earnings estimate of $3.20 per share, which we consider attractive for a business of this quality. Even without assuming aggressive growth, this valuation provides a margin of safety and the potential for attractive returns should the company deliver on its new 5 year growth plan.
We have initiated a position at ~$35.00 and would look to add more should the price decline further.
Leave us a comment on a business you think has a moat or significant competitive advantages. We would love more recommendations from our readers. Stay tuned for our next newsletter, hopefully with this revamp and the current market dynamics, they will become more frequent and consistent moving forward.
Some companies we are starting to look at are below.