WillScot Holdings: A Well-Positioned Stock If Interest Rates Fall (NASDAQ:WSC)

WillScot Holdings Corporation (NASDAQ:WSC) has been pressured by high interest rates in 2022, which have slowed demand for their modular and storage products due to a decline in small, non-residential construction projects.

Still, the potential the interest rate cut on September 18 could be a turning point for the company, although I don’t think the positive effects will be immediately visible.

In this article, I thought I’d review the company’s recent performance, with a focus on the pressures and headwinds it’s currently facing.

In the outlook section, I’ll go through some of their key financial metrics, looking at share buybacks and recent insider buying activity by the company’s CEO, which motivated my Hold rating.

For now, I’ll start with a brief company overview section for those new readers this stock.

Company overview

WillScot Holdings Corporation is an Arizona-based company specializing in the rental and sale of modular space and portable storage units. They operate over 250 branches in the US, Canada and Mexico.

Their fleet consists of over 152,000 modular space units and 206,000 portable storage units.

They operate in two business segments:

• Modular: As the name suggests, this segment is focused on providing modular office spaces and other temporary workspace solutions.
• Warehousing: This segment focuses on portable storage containers and ground-level office rentals.

I thought I’d include a breakdown of revenue by segment from their latest annual report below.

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Given that they operate in three countries, we’ve included a breakdown of their revenue by geography below.

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In terms of ownership, the total amount of shares for all directors and executive officers amounts to 3.3% of the common shares. In my view, this is a small amount of skin in the game.

Additionally, the only person with more than 1% beneficial ownership is Jeff Sagansky (Director). I have to admit that I feel disappointed that the CEO, Bradley Soultz, owns less than 1% of the common stock.

Headwinds and high interest rates

One of the strongest headwinds facing the company in 2022 is the slowdown in non-residential construction. Construction starts are down 14% from last year, which makes me sweat, considering this sector contributes about 40% of total revenue.

Rising interest rates from Q1 2022 have led to a slowdown in construction projects, especially smaller ones that rely heavily on construction financing.

Despite a potential rate cut on September 18, I think the positive effects will take some time to be seen. And I think management thinks the same, because in Q2 2024 they forecast steady modular volume growth for the rest of the year.

Another challenge comes from the slowing growth of modular activations. Just to clarify, when a modular unit is activated, it means that it has been put into service at a customer’s location, generating revenue for the company through leasing contracts.

Growth in these modular activations was only 1% from last year, prompting management to lower full-year revenue guidance to a range of $2.4 billion to $2.5 billion.

Another significant challenge in Q2 2024 came from a $133 million non-cash impairment charge as a consequence of their brand consolidation strategy.

Essentially, since acquiring Mobile Mini in 2020, the company has had two major brands offering similar types of products. To simplify matters and improve efficiency, WillScot has decided to retire the Mobile Mini brand and operate solely under the WillScot name.

As a result, they had to write down the value of the Mobile Mini brand, which was an intangible asset. As a result, they incurred a non-cash charge of $133 million, which largely contributed to the $47 million net loss for the quarter.

In terms of the company’s headcount, slower growth and weaker demand from smaller construction projects has led to a 15% reduction in its indirect workforce, which is expected to generate annual savings of €40 million. dollars.

In my view, downsizing is a poor strategy to offset some of the pressures from the revenue shortfall. The main reason I think so is that when demand inevitably increases, finding skilled and experienced labor becomes very difficult, which can directly affect their ability to deliver to customers.

Outlook

Let’s start by taking a look at the weekly chart below to understand the big picture.

Since 2022, the share price has been trading sideways, which makes sense as interest rates started to rise at the end of Q1 2022. As mentioned in the previous section, this had a direct impact on the start of small non-residential construction projects .

In terms of financials, since the end of last year, both operating income, net income and EBITDA have been declining.

A look at their balance sheet shows that both total debt and total current assets have been relatively stable over the past year.

Additionally, in Q2 alone, the company did some decent share buybacks. They repurchased about 2 million shares, for $79 million, which in my view is a decent amount.

In terms of cash flows, there has been a decline in both operating cash flow and free cash flow since Q4 2023.

However, free cash flow has been positive in recent years, which is something I value highly in a company.

They don’t pay dividends, which means they can use the extra cash to reinvest in the company.

In terms of insider purchases, the CEO bought a significant amount of shares in March and May this year. I highly favor his insider trading activity, given that the stock price has been falling since February of this year.

Therefore, despite a lower full-year revenue guidance and sluggish demand in small non-commercial projects due to high interest rates, I believe the company has healthy financials to survive until interest rates come down and demand picks up.

However, I don’t think the effects of a rate cut will be visible this year, which is the main reason I maintain a Hold rating on this stock.

Conclusion

In conclusion, despite strong headwinds in the non-residential construction sector due to high interest rates, I believe WillScot Mobile maintains a strong financial position.

The significant number of share buybacks in the second quarter, along with insider buying activity by the company’s CEO, leads me to believe that management has confidence in the current stock price. This, along with positive free cash flow and a potential interest rate cut in September, drives my Hold rating.