Innovative FLEX Solutions And Strategic Expansions Set To Bolster Revenue And Margins

Key Takeaways

• Strong demand in sectors like industrial and energy for WillScot's modular products and innovative solutions is expected to boost revenue.
  
• Operational efficiency and cost-saving measures post-Merge with Mobile Mini aim to enhance net margins.
  
• The company faces risks from sector-specific downturns, changes in construction starts, operational efficiencies post-merger, and regulatory approval challenges impacting revenue and margins.

Catalysts

Provides workspace and portable storage solutions in the United States, Canada, and Mexico.

• Strong demand for larger-scale projects in sectors like industrial, manufacturing, energy, data centers, and infrastructure is expected to drive demand for WillScot's modular product lines, especially their innovative FLEX solutions, impacting revenue positively.
  
• The company's operational efficiency and cost-saving measures, including a 15% reduction in indirect headcount due to the harmonization and optimization of systems and processes post-merger with Mobile Mini, are expected to bolster net margins.
  
• Investments in digital customer experience enhancements and sales tools, such as the new willscot.com and Project One, aim to optimize selling time and improve conversion rates, potentially increasing revenue.
  
• Expansion into new space solution offerings, including climate-controlled storage and clearspan, aligns with WillScot's diversification strategy, potentially impacting revenue growth.
  
• The pending acquisition of McGrath, despite its current review by the FTC, highlights strategic expansion efforts that, upon completion, could offer additional revenue streams and operational synergies, influencing earnings positively.

Assumptions

• Analysts are assuming WillScot Holdings's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.8% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $608.5 million (and earnings per share of $2.58) by about August 2027, up from $187.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, down from 39.1x today. This future PE is lower than the current PE for the US Construction industry at 27.7x.
• Analysts expect the number of shares outstanding to decline by 4.47% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Risks

• The reliance on larger-scale projects in sectors like industrial, manufacturing, energy, data center, and infrastructure could expose revenue to risks related to sector-specific downturns or delays in project commencements.
  
• A decrease in nonresidential construction starts, especially in smaller-scale commercial construction and interest rate-sensitive projects, may continue to influence revenue negatively by reducing demand for storage and modular solutions.
  
• The implementation of streamlined processes and a 15% reduction in indirect headcount, while potentially improving margins in the short term, carries execution risk that could affect operational efficiency and customer satisfaction, impacting revenue and margins if not managed carefully.
  
• Dependence on the successful integration of IT systems and operations post-merger with Mobile Mini, including the harmonization of SAP and Salesforce.com systems, presents risks to operational efficiency and could influence net margins negatively if integration challenges arise.
  
• Regulatory review and approval processes for the acquisition of McGrath represent an external risk that could impact future earnings, depending on the outcome and any associated costs or operational restrictions imposed as part of the regulatory approval.

Valuation

• The analysts have a consensus price target of $47.62 for WillScot Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $61.0, and the most bearish reporting a price target of just $39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.8 billion, earnings will come to $608.5 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $38.81, the analyst's price target of $47.62 is 18.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.