Should Mobile Mini be the Prince Charming of Your Portfolio?
Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: The original version of this post incorrectly identified Mobile Mini's debt at $700 billion. The correct figure is $692 million. The post has been changed to correct this error.
There is no way to paint Mobile Mini, Inc. (NASDAQ: MINI) into an attractive picture. This debt-burdened wart covered toad missed EPS and revenue estimates in its latest quarter and investors sold it all the way down to the great-recession level price of $13.31. The stock price has bounced up a bit over the past week, but it still languishes around its 52-week low. This low is not simply related to the markets. Even with worries from Europe hanging over the market, the broad S&P Home Builders ETF (NYSEMKT: XHB) and the SPDR S&P Retail ETF (NYSEMKT: XRT) are outperforming the market over the past 12 months. Mobile Mini thrives when construction and retail are growing, so what gives?
Every investor should hate this company, and by the chart, most do. It runs an ultra boring business of renting storage containers and portable offices. About a third of its business comes from the construction market. Add to this a bloated total debt load of $692 million after an ill-timed acquisition in 2008.
Mobile Mini meets every criterion for being unloved and unappreciated:
52-week lows? Check
Out of favor industry? Check
Warty toad? Double Check
Should I kiss this frog?
Long-term foolish investors know that poking around in the trash after a quarterly earnings miss can uncover some valuable gems. The question we should ask is whether or not there is value hiding on MINI’s books?
Diverse Customer Base – The largest segment of MINI’s customers (69%) are retailers who use MINI containers as storage and construction outfits who store tools and material during a build and use portable offices for temporary operations hubs. Currently, only 5% of MINI’s customers are households. The good news is that MINI rented units to 80,000 different accounts in 2011. A diverse customer base makes MINI immune to the fickle fortunes of one or two accounts.
Book Value – MINI’s core assets are its portable storage containers. These containers are made of steel and have a patented locking system. Because the units are heavy duty (unlike wood units from competitors) they last over 30 years with minimal maintenance other than cleaning and a fresh coat of paint. MINI estimates the value of its fleet at slightly over $1 billion. MINI’s creditors assess the fleet’s liquidation price at $832 million. Any way you slice it, MINI has real tangible value on its books.
Growth – Unfortunately, MINI’s utilization of its storage units is not spectacular, clocking in at less than 60% for the past twelve months. Luckily, MINI has a 2-prong plan to put its 140,000 unproductive mobile units to work. First up is expansion to new markets. The company has 50 new locations under review with plans to enter ten new cities in North America and Europe this year. The second leg of MINI’s growth plan is its most enticing. The company is going head-to-head with home-storage and moving companies like the privately owned PODS and publicly traded AMERCO (NASDAQ: UHAL), the parent company of the U-Haul. MINI estimates about 20% of the calls to its customer centers are for consumer use. In the past, these calls were turned away. In the future, those calls will translate into a large revenue booster. The home storage market is a $20 billion opportunity. If MINI can capture a small slice of the pie, investors will prosper.
Debt -- With Mobile Mini, there is only one major red flag. MINI is saddled with $692 million in debt. The company recently restructured its debt to lower interest rates and push out repayment, but the debt has consumed nearly all of the company’s free-cash-flow over the past four years.
Toad, Meet Lips?
Last year, MINI produced about $80 million in FCF after paying over $46 million in interest expenses. This tells us that a debt-free MINI could produce $126 million in FCF. And that assumes no growth from entering new territories or growth from the home-storage market. If MINI is able to boost its fleet utilization percentage and eliminate all of its debt, FCF could top $150 million.
To get the ball rolling the right direction, MINI needs to keep killing its debt. If the company can pay down $70 million a year, it should be able to cut its interest payments to around $23 million by the end of FY 2016. I believe it can make this mark for two reasons. First, I believe MINI’s growth strategy makes sense. Second, each dollar of debt paid down by MINI will boost cash flow freed up from interest payments that can be used to pay down more debt. MINI should be able to average more than $80 million in debt reduction annually for the next five years.
The value question then becomes, what is MINI worth at the start of FY 2017? With a hypothetical $350 million in debt and roughly $800 million in liquidation value assets, the company is on firm financial footing. $125 million of FCF will likely be used to service MINI’s now modest debt, fund small acquisitions, and possibly even reward patient shareholders with a dividend. If MINI trades at a modest 10 times FCF, the company should conservatively fetch $1.25 Billion in market capitalization or nearly 80% in capital gains from today’s prices. That is slightly better than a 12% annualized return. If MINI continues to trade lower, investors should be well rewarded by picking up shares below $11. Those gains are likely to come in at 20% annualized after five years.
I believe in buying ugly companies that have the ability to pick themselves up and dust themselves off. That is why I will continue my Caps selection on MINI with a big green thumb. I also own shares of MINI and plan to add if the story holds together and the price drops below $11/share.
Do you agree? Can Mobile Mini pay off its debt and return value to shareholders, or should we toss this toad back in the pond?
BoiseKen has a long position in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Mobile Mini. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.