Mobile Mini (Nasdaq:MINI) is the world's largest supplier of portable storage solutions. It reported first quarter earnings May 6 that were impressive to say the least. With its stock sitting near an all-time high, it's hard to imagine that now's a good time to buy. Nonetheless, I'll look at the pros and cons of owning its stock.
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In its Q1 earnings release Mobile Mini indicated that this was the ninth consecutive quarter growing its comparable leasing revenue, up 8.4% to $85.1 million. Its quarterly leasing revenue was its highest Q1 since 2009. While Mobile Mini makes most of its money leasing these containers, it also sells them to customers as well. In the first quarter leasing accounted for 87% of its overall revenue with sales responsible for the remaining 13%., growing by an impressive 27.1% to $12.5 million. Since the end of the first quarter in March 2009, its stock is up 183.6% as of May 6. That's not coincidental.
Even more impressive than what it's doing on the top line is what's happening on the bottom line. Its adjusted EBITDA in the first quarter was $37.8 million, 21.7% higher year-over-year. Its adjusted EBITDA margin improved 360 basis points to in Q1 2013 to 38.6%. One of the reasons for the big improvement was the 340 basis point increase in its fleet utilization to 60.2%. Historically, prior to the recession, Mobile Mini's fleet utilization rate was usually 78% or higher. The fact that it's able to increase its profitability despite only 60% fleet utilization is an indication it's done a good job passing on any cost increases to the customer while also managing its overhead.
By being good at growing revenues and controlling costs, it's been able to generate positive free cash flow (FCF) in 21 consecutive quarters. That goes back to the beginning of 2008, which means it was able generate free cash flow in the teeth of the recession. In the first quarter it generated $26 million in free cash flow compared to $13.9 million in last year's Q1. CEO Erik Olsson commented, "The year started on a strong note. Looking ahead, we anticipate that we will continue to generate comparable period growth in leasing revenues through the balance of 2013 which, with our strong operating leverage, should translate into year-over-year EBITDA margin expansion." If not for the lower fleet utilization rates, Mobile Mini would likely be generating record revenues and earnings.
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Valuation would definitely be its only weakness at this point. Currently trading at 3.4 times sales, its price-to-sales ratio is at the same level it was in 2006. However, its operating margin back then was almost 50% higher at 36.4%. But if you go one step further and compare its P/S ratio to that of the S&P 500, you'll see that in both years, it was about double the index. So, you can look at this in one of two ways: either the S&P 500 is overvalued today in comparison to 2006 or Mobile Mini's stock was undervalued in 2006 compared to today. My own personal opinion is that the latter statement is a more accurate assessment when it comes to valuation.
Mobile Mini's executive compensation analysis lists a total of 21 peers. Its most direct competition comes from McGrath Rentcorp (Nasdaq:MGRC), whose modular businesses include the sale and leasing of modular storage units. Its current enterprise value is 11.4 times EBITDA compared to 14.1 times for Mobile Mini. Given Mobile Mini has stronger operating margins, I'll call this a wash. Zacks compares Mobile Mini to three companies: Crown Holdings (NYSE:CCK), Silgan Holdings (Nasdaq:SLGN) and Ball Corp. (NYSE:BLL). The average enterprise value of the three is 9.3 times EBITDA, considerably less than Mobile Mini. However, their operating margins average 10%, less than half Mobile Mini's.
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This isn't an easy decision. Its stock is fairly valued at present but definitely not undervalued. If it wasn't for Mobile Mini's lower than historical fleet utilization rates, I'd probably pass. But given a better economy will translate into higher margins, I'm inclined to recommend buying up to $36 and definitely anywhere below $30.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.