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

Joao Manita/iStock via Getty Images WillScot Holdings Corporation (NASDAQ:WSC) has been pressured by high interest rates since 2022, which slowed down demand for their modular and storage products due to a downturn in small, nonresidential construction projects. However, the potential interest rate cut on September 18 could be an inflection point for the company, although I don’t believe the positive effects will be immediately visible. In this article, I considered reviewing the recent performance of the company, with an emphasis on the pressures and headwinds that they are currently facing. In the outlook section, I will go through some of their key financial metrics, analyzing share buybacks and the recent insider buying activity by the CEO of the company, which motivated my Hold rating. For now, I will begin with a brief company overview section for those readers new to this stock. Company Overview WillScot Holdings Corporation is an Arizona-based company, specializing in leasing and selling modular space and portable storage units. They operate over 250 branches across 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 indicates, this segment is focused on providing modular office spaces and other temporary workspace solutions. Storage: this segment is focused on portable storage containers and ground-level office rentals. I considered including below a breakdown of the revenue per segment from their latest annual report. Year Modular Revenue ($M) Storage Revenue ($M) Total Revenue ($M) 2023 1,495.7 869.1 2,364.8 2022 1,342.0 800.6 2,142.6 Click to enlarge Given that they operate in three countries, I included below a breakdown of their revenue per geographical area. Year United States ($M) Canada ($M) Mexico ($M) Total Revenue ($M) 2023 2,219.6 120.1 25.1 2,364.8 2022 1,998.8 125.5 18.3 2,142.6 2021 1,542.1 116.1 14.8 1,673.0 Click to enlarge Ownership-wise, the aggregate amount of shares across all directors and executive officers adds up to 3.3% of the common stock. In my view, this is a small amount of skin in the game. Additionally, the only individual with a beneficial ownership over 1% 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. SEC | 14A Headwinds And High Interest Rates One of the strongest headwinds that the company has been facing since 2022 is a slowdown in nonresidential construction. Construction starts were down 14% YoY, which makes me sweat considering that this sector contributes to approximately 40% of the total revenue. The increase in interest rates since Q1 2022 has led to a slowdown in construction projects, particularly smaller scale ones, that heavily rely on financing for execution. Despite a potential cut in interest rates on September 18, I believe the positive effects will take some time to be visible. And I believe management thinks the same, as in Q2 2024 they forecasted flat modular volume growth for the remainder of the year. Another challenge comes from a slowdown in growth in modular activations. Just to clarify, when a modular unit is activated, it means that it has been placed into service at a customer’s site, generating revenue for the company through leasing agreements. The growth of these modular activations was only 1% YoY, which led management to lower the full-year revenue guidance to a range of $2.4 billion to $2.5 billion. Another significant challenge in Q2 2024 came from a non-cash impairment charge of $133 million, as a consequence of their brand consolidation strategy. Essentially, since acquiring Mobile Mini in 2020 the company had two major brands offering similar types of products. To make things simpler, and to improve efficiency, WillScot decided to retire the Mobile Mini brand and operate only under the WillScot name. As a result, they had to write down the value of the Mobile Mini brand, which was an intangible asset. Therefore, they incurred a non-cash expense of $133 million, which contributed heavily to the net loss of $47 million for the quarter. In regard to the headcount of the company, the slower growth and weaker demand from smaller construction projects led to a reduction in its indirect headcount by 15%, which is expected to generate $40 million in annualized savings. In my view, reducing the headcount is a poor strategy to offset some of the pressures caused by the revenue shortfall. The main reason I believe so is that when demand inevitably picks up, finding qualified and experienced labor becomes very challenging, which can directly impact their ability to deliver to their customers. Outlook Let’s start by having a look at the weekly chart below to understand the bigger picture. TradingView Since 2022 the share price has been trading sideways, which makes sense as interest rates started to increase at the end of Q1 2022. As mentioned in the previous section, this had a direct impact on the start of small nonresidential construction projects. In regard to their financials, since the end of last year, both operating income, net income, and EBITDA have been declining. TradingView A look at their balance sheet shows that both total debt and total current assets have been relatively flat over the last year. TradingView Furthermore, in Q2 alone, the company has done some decent share buybacks. They repurchased about 2 million shares, for $79 million, which, in my view, is a decent amount. In regard to cash flows, there has been a decline in both operating cash flow and free cash flow since Q4 2023. TradingView However, free cash flows have been positive for the past few years, which is something I highly value in a company. They don’t pay any dividends, which means that they can use the additional cash to reinvest it back into the company. In regard to insider buying, the CEO has been buying a significant amount of shares in March and May this year. I highly favor his insider trading activity, given that the share price has been declining since February this year. Therefore, despite a lower full-year revenue guidance, and slow demand in small noncommercial projects due to high interest rates, I believe the company has healthy financials to survive until interest rates go down and demand picks up. However, I don’t believe that the effects of a rate cut will be visible this year, which is the main reason why I maintain a Hold rating for this stock. Conclusion To wrap up, despite strong headwinds in the nonresidential construction sector due to high interest rates, I believe WillScot Mobile maintains a solid financial position. The significant amount of share buybacks during the second quarter, along with insider buying activity by the CEO of the company, makes me believe that management is confident in the current share price. This, coupled with positive free cash flows and a potential interest rate cut in September, motivates my Hold rating.

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