MOBILE MINI INC MINI S
March 15, 2015 - 1:02am EST by
Bravo
2015 2016
Price: 40.69 EPS 0 0
Shares Out. (in M): 45,948 P/E 0 0
Market Cap (in $M): 1,869 P/FCF 0 0
Net Debt (in $M): 793 EBIT 0 0
TEV ($): 2,663 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

Sign up for free guest access to view investment idea with a 45 days delay.

  • Equipment Rental
  • Rollup
  • winner

Description

For more background on the company, read  jujuiris15 idea published in 2010. The stock has gone up a lot in last two years, largely because of change in leadership and some other actions taken by the new managment. I believe some of these action have actually helped the competition in a fragmented industry.

background image

Investment thesis : Mobile Mini (MINI) 

 

• 

Peak valuation, potentially because of where the US is in 

business cycle; MINI is trading at double of replacement 
value which can affect equity in case of impairment/appraisal. 

• 

Aggressive depreciation and disclosure modifications around 

asset composition and refurbishment expenses, which hide 
asset age profile and inflate earnings. 

• 

MINI’s poor disclosure hide real economics of sale 

transactions from fleet as filings show average cost per units 
is $2,411 while average cost of a refurbished unit is about 
$3,500. Either MINI is cherry picking units or there is a high 
blend of non-refurbished units. 

• 

Sellside is assuming 50% EBITDA margin and the stock price 

reflects 10% FCF growth till 2025. It is unlikely that MINI can 
post 10% growth in a fragmented industry with oversupply and 
with its high cost structure.  

• 

Upside/Downside ratio for MINI does not justify investing in 

the stock as on the upside MINI can capture 11% of gain while 
lose 90% of value in the downside scenario.

 

Recommendation: Sell 
 
• 

MINI is one of the world’s largest providers of 

portable storage solutions, with a total fleet of about 
213,500 units in 2014. 

• 

Mobile storage solution industry is highly 

fragmented and mature, with oversupply of 
containers. Small companies have been underpricing 
MINI by 10-30% in a commodity market, taking 
customers away from MINI 

• 

Compared to small operators MINI has high fixed 

cost structure and significant financial leverage that 
leaves little scope in terms of pricing power 

• 

Sellside and MINI’s management do not consider 

utilization rate in calculating MINI’s economics, 
which would increase payback period by 1-2 years. 
Moreover, MINI’s ROA has been significantly lower 
than its cost of capital over the entire business cycle.  

• 

MINI has been growing through roll-outs and 

acquisitions. MINI’s recent major acquisition of ETS 
produces significantly less operating margin (17.1%) 
and free cash flow than MINI’s (23.2% in 2014) 
legacy steel container business. Further, the recent 
decline in energy prices could impact the newly 
acquired business significantly.  

  

background image

Agenda 

• 

Business description 

• 

Evaluation of Mobile Mini’s business 

• 

Scenario embedded in Mobile Mini’s stock price 

• 

Valuation of Mobile Mini’s stock 

• 

Investment recommendation

 

background image

Business description and industry at a glance 

Mobile Mini (MINI) 
 
•  MINI was founded in 1983 and follows a 

strategy of focusing on leasing rather than 
selling portable storage units. 

•  Mini is one of the world’s largest providers of 

portable storage solutions, with a total fleet of 
about 213,500 units in 2014. 

•  As of 2014, the company operates in 115 

locations across the United States, as well as 
four locations in Canada and 17 locations in the 
United Kingdom.  

•  Mini’s has more than 80,000 customers across 

various industries, including construction, 
consumer services and retail, industrial, 
commercial and governmental markets.  

•  Mini has expanded by acquiring the fleet assets 

of small local portable storage businesses. The 
company’s most significant acquisition remains 
its merger with Mobile Storage Group in 2008.  

Industry at a glance: Key statistics 
 
 
 
 
 
 
•  Major demand driver is residential market which 

makes up the industry’s largest revenue source (80.0% 
of all revenue), with demand dependent on existing 
home sales and housing starts.  

•  Second major demand source is retail sector. Strong 

demand from retail markets increases the need for 
higher stock levels, and, therefore, boosts industry 
revenue.  

•  Major market segmentation in 2014 

§  Short term residential customers (60.2%) 
§  Long term residential customers (19.8%) 
§  Commercial clients (16.4%) 
§  Others (3.6%) 

§  The industry is in the mature stage of its life cycle. 

Over the 10 years to 2019, the industry’s is expected to 
grow at an average annual rate of 2.8% vs. project 
GDP growth of 2.7%.  

 

Source: IBIS World 

 
 
 

background image

Fragmented industry structure 

Source: IBIS World    * Metropolitan cities 

•  The Mobile Storage Services industry has a low level of market share concentration.  
 
•  In 2014, the top four firms in the Mobile Storage Services industry are expected to 

account for an estimated 18.4% of the industry’s revenue.  

MINI 

PODS 

Door-to-Door 

Founded 
# of US states (location) 
Fleet size 
# of customers 
Financials (2014) 
Revenues (in $ mn) 
Growth % 
Operating income (in $ mn) 
Operating margin % 

1983 

28 

213,500 

80,000 

 

445.5 

9.6 

99.4 
22.3 

1998 

48 

140,000 

239mn 

 

632.3 

10.5 
76.9 
12.2 

1996 

20* 

 

170mn 

 

232.6 

4.4 

34.6 
14.8 

Agenda 

• 

Business description 

• 

Evaluation of Mobile Mini’s business 

• 

Scenario embedded in Mobile Mini’s stock price 

• 

Valuation of Mobile Mini’s stock 

• 

Investment recommendation

 

background image

Low pricing power and cyclical growth  

• 

MINI operates in a fragmented market with commodity offerings where local mom-and-pop operators 
underprice MINI by 10-15% on rent and about 30-40% on delivery charges. (See appendix 1) 

• 

MINI has increased prices by 14% in last six quarters. The net effect is decline in total units on rent by 
0.2% despite high utilization of 72.8% in Q4 2014 vs. 68.8% in Q3 2013. 

• 

With cost cutting pressure in retail and in oil and gas, Mini’s pricing strategy is benefiting competition.  

• 

During the recession, the slowing US economy and depressed real estate markets hit the Mobile Storage 
Services industry particularly hard. Industry revenue contracted steeply in 2009 as a result, falling 11.1%. 

• 

MINI’s revenue has significant exposure (88%) to construction, retail, and industrial and commercial markets, 
which are cyclical in nature. 

• 

US economy is facing mid-cycle expansion which is benefiting construction and limited consumer spending 
with potential slowdown in activity in late phase.  

• 

Following a nine-month stretch of positive billings in 2014, the Architecture Billings Index (ABI) reflects 
positive growth in commercial construction for approximate next nine to twelve months. 

• 

MINI is a capital intensive business with significant book value reflected in fleet and goodwill 

• 

With high fixed cost structure, cyclical nature of business, and high competitive intensity, MINI’s ROCE has 
fluctuated significantly from 3.9% to 6.6%.  

• 

MINI’s high fixed cost structure and CAPEX intensity is also visible from declining incremental operating 
margin since last three years (27.2% in 2012, 22.7% in 2013, and -14.2% in 2014), resulting from investing in 
fleet through acquisitions, rollups, and maintenance.  

• 

MINI’s suppliers are shipping and container companies reselling containers in aftermarket

• 

Container industry has been facing several more years of oversupply, warned Maersk’s CEO Andersen in 
mid-2014. Alphaliner, is reported as stating global carriers are due delivery of 1.8m TEU of capacity, which is 
an 8% growth in supply. This far outstrips the reported 6.7% forecasted growth in 2015.

• 

High supply of containers can cascade in aftermarket supply, which can affect leasing rates in an already 
fragmented industry.

Pricing power 

Performance 
across cycles 

CAPEX 
intensity 

Competition 
intensity 

background image

Misleading unit economics and questionable growth  

• 

Sellside and management often quote MINI’s portable storage container’s highly profitable economics 
and payback period of three years, which ignores utilization rate. Based on average utilization rate 
(2009-14) of 63.5%, MINI’s average payback period for a container is about 4.5 years. 

• 

 MINI does not highlight unit economics of other assets in its fleet. MINI does not provide sufficient 
disclosure on other assets to calcualte unit economics of these assets, despite the fact that offices alone 
comprise 42% of value of gross book value of MINI’s fleet (includes assets from ETS acquisition). 

• 

Based on an assumption of 60% of utilization and $1,000/month for wooden offices and $350/month 
(charged by comp) for steel offices with $29,000 cost for wooden office and $14,000 for steel offices, 
payback period for MINI’s wooden offices is about 4.2 years and about 5.6 years for steel offices.

• 

In fact unit economics for MINI’s manufacturing plant and wooden office have been so bad that MINI 
stopped buying wooden offices and shut down its manufacturing plant that made steel offices. Renting 
these higher priced units make their overall yield look more attractive but have worse unit economics.

• 

MINI’s growth has been fueled by rolling up competitors. MINI spends about $8-10mn per year to 
acquire small operators at 5-6x EBITDA. In absence of sufficient disclosures, it is hard to determine, how 
these roll-ups are working for MINI.

• 

ETS’ acquisition (similar to MSG) is at the top of market where investors are still paying companies to 
grow at the expense of making money or generating cash. With ETS, MINI decided to expand outside of 
its traditional steel storage container business. 

• 

MINI paid $405 million in cash, or 9x EBITDA, by more than doubling the size of its secured debt load. 
The transaction put the $200 million in unsecured bonds below more than $700 million in secured debt 
and increased the company’s total leverage ratio to 4.5x. 

• 

ETS’ business produces significantly less operating margin (17.1%) and free cash flow than MINI’s 
(23.2% in 2014; see appendix 2) legacy steel container business. Further, the recent decline in energy 
prices could impact the newly acquired business significantly. 

Unit economics 
and asset profile  

Growth through 
roll-up and 
acquisitions 

background image

Doubts on ETS’ acquisition and MINI’s fleet quality 

• 

MINI allocated about 64% ($264mn; see appendix 2) to goodwill for ETS transaction. With 
relatively lower operating performance, macro overhang from oil and gas, and integration 
difficulties because of unrelated businesses, MINI may have to write down ETS’ goodwill.

• 

ETS’ adjusted payback period is at high range (4.2 to 5.6 years; see appendix 3) compared 
to MINI’s fleet. Assuming MINI spends another $1,500 to refurbish ETS’ fleet, payback 
period will increase by another four months to one year, which would further dilute ETS’ 
economics. 

ETS acquisition 

analysis 

• 

MINI’s sale transactions from fleet shows that majority of units sold are held less than 5 
years (see appendix 4), their average cost per units is $2,411. However, average cost of a 
refurbished unit is about $3,500 ($2000 for container plus $1,500 for refurbishment). 

• 

Either MINI is cherry picking units which they bought cheap or there is a high blend of non-
refurbished units.

• 

MINI has aggressive assumption of 30 years of life of storage container and 55% of residual 
value for calculation of depreciation. MINI’s competition follows 20-25 years of life with 
50-63% of residual value for similar assets.  

• 

McGrath Rentcorp follows 25 years, 62.5% residual value 

• 

Algeco Scotsman Global S.à r.l.: 20 years with a residual value of 50%

• 

General Financial Corporation: 5 to 20 years with a residual value of up to 70%

• 

Shipping and container-lease companies depreciate containers for 13-15 years with 50% of 
residual value. Usually, mobile storage containers have 25-30% higher life compared to 
shipping containers.

• 

Since MINI uses 30 years of life compared to industry standard of 20 years, MINI’s 
earnings and remaining age of fleet are inflated by lower depreciation. Some Glassdoor 
reviews also mentioned aged inventory. Link: http://bit.ly/1wdwCJY

MINI’s fleet 
assessment 

background image

Other concerns: Poor disclosures and uncertainty about strategy 

• 

MINI has been sharing less information and disclosure than before. Despite a demand for 
more transparency from Shamrock Activist Value Fund, MINI has been sharing less 
information on assets and leases. 

• 

For example, MINI’s 2014 10-K lacks information on representative sale prices from fleet which was 
last available in 10-K of 2013. 

• 

Missing information on refurbishment cost per unit by year of purchase, which was last seen in 2009. 

• 

Missing information on composition and utilization of  containers, wooden and steel offices. 

• 

MINI started increasing price from last six quarters. As MINI’s portable storage fleet has 31 
months of lease, a significant part of customers are still on old rates. With increasing cost 
pressure in retail, MINI might face higher churn from upcoming leases. 

• 

Based on Glassdoor reviews and feedback from competition, MINI’s new sales and pricing 
strategy have led to high turnover among branch employees for the benefit of competition.  

• 

Competition in Los Angeles and the Bay Area market confirmed that they are having more 
handshakes with customers each week because of MINI’s change in pricing and sales strategy. 

• 

MINI’s pricing increase is largely cost driven as MINI faces high fixed cost structure 
compared to small operators as MINI’s EBITDA margin has declined steadily since peaking in 
2009 at 42% and came came in at only 29% in 2014. 

• 

Although investor’s applauded change in MINI’s CEO by significant change in stock price 
since 2013, Glassdoor’s reviews highlight confusion, high turnover, and lack of processes.

• 

Some investors and former employee’s do not approve new management’s action. 

• 

For example, Intrepid Fund highlighted in its commentary that they exited a newly established 
bond position in MINI for a loss as the management blind-sided them with ETS acquisition.

• 

Former Branch Manager and competition of MINI’s also shared investor’s concern about 
inferior economics and macro overhang of ETS’ acquisitions.

Disclosure issues 

Duration of lease 
and rent-roll 

Change in sales 
and pricing 
strategy 

Quality of 
management 
team 

background image

Other concerns: Poor returns and quality of book value 

10 

• 

Under the pretext of growth stock, which is questionable, MINI’s return on assets has been 
lower than cost of capital, which is a relevant indicator as MINI is asset intensive while 
earnings are affected by low depreciation. 

• 

MINI’s gross book value per container as of Dec 31, 2014 is about $3,890, while a 40ft 
container can easily be purchased for $1,700-1,900 on eBay Link:http://ebay.to/1CLRcDp.

• 

Competition highlighted that these containers can be purchased for $1,600-1,800 in bulk while 
refurbishing a container costs $300-400, which means that MINI’s 40ft container is valued at 
$1,900 to $2,200 and 20ft at $1,800 to $2,000 in the market.

• 

If a reappraisal were to happen to MINI, it would have to take impairment on its fleet. Given 
MINI has a container fleet with a $640mn in gross book value, 20% would cut MINI’s book 
value by $128MM and might also breach financial covenants and affirmative covenants.

• 

Overall insider ownership of MINI’s stock is about 1.76% of outstanding stock compared to 
more than 7% among competition.  

Returns lower 
than cost of 
capital 

Book value vs. 
aftermarket 
prices 

Low insider 
ownership 

background image

Agenda 

• 

Business description 

• 

Evaluation of Mobile Mini’s business 

• 

Scenario embedded in Mobile Mini’s stock price 

• 

Valuation of Mobile Mini’s stock 

• 

Investment recommendation

 

11 

background image

Bull case on MINI’s stock 

12 

• 

Sellside shares MINI’s enthusiasm about three years payback period of fleet container, 
which does not include utilization rate as explained previously 

• 

Sellside has been modeling 80% utilization rate for MINI in 2016 and 21% increase in 
yield. These assumptions are aggressive as MINI have not had 80% utilization since it 
peaked in 2006 and fragmented competition with high supply of containers would not leave 
much scope for further price increase.  

• 

Although the US economy is in mid-expansion, usual growth in MINI’s target segments is 
about 6-7% in next two years while these were projected to grow more than 8% in previous 
boom cycle. Moreover, MINI’s revenue grew by 19% five year CAGR before Dec 2006 vs 
3.5 in Dec 2014.   

• 

Management believe in ultimate potential of 50% EBITDA margin from 28.1% in 2014. 
These projections are also aggressive. With constant roll-ups and high fragmentations, 
MINI’s SG&A are unlikely to come down by half to increase EBITDA margin by twice. 

• 

Consensus estimates are valuing  MINI at 9-10x forward EBITDA in 2016. MINI’s revenue 
growth has been slow considering 9-10x multiples. Based on historical multiple 9-10x 
implies about 18% five-year CAGR in EBITDA compared to MINI’s -3% five-year in 2014. 

• 

Based on consensus estimate of $111mn in FCF in 2015 and terminal growth of 3% after 2025, 
MINI’s FCF will have to grow by 10% CAGR till 2025 to justify today’s price of $40.31. 

• 

Other assumptions are WACC of 8.2% and target debt to value of 30%. 

• 

MINI’s has grown by EBITDA by 10% CAGR in the entire business cycle starting from 2006.  

• 

It is unlikely that MINI can maintain consistent growth in a fragmented industry with 
oversupply and high cost structure. However, since 10% CAGR is the peak growth rate for 
MINI, the present stock price looks fairly valued, if MINI can sustain 10% growth in FCFs. 

Assumption 
about Unit 
economics 

Reverse DCF 

background image

Bull case on MINI’s stock 

13 

• 

Sellside and investors’ assume that MINI has the ability to pay off their debt through 
their high cash flow generation. Despite cash generation, MINI’s growth strategy throw 
roll-ups as well as shareholder friendly actions like buyback and dividends have been 
increasing debt levels consistently. If MINI’s earnings peak in 1-2 years then MINI can 
be vulnerable as it would have expanded rapidly at the top of the cycle using leverage. 

 
• 

Most initiation report states that MINI’s fleet of fixed assets does not lose its value as it 
grow older. However, constant repair and maintenance expenses each quarter tell a 
different story. 

• 

MINI’s scale and brand recognition help the company charge higher prices compared to 
the competition. However, container is a commodity product where a low cost operator 
has higher flexibility in the market compared to MINI. MINI’s fixed expenses in 
managing yards, salaries, and offices lead to a higher cost structure compared to a small 
mom-and-pop shop. 

Market 
assumptions 

background image

Agenda 

• 

Business description 

• 

Evaluation of Mobile Mini’s business 

• 

Scenario embedded in Mobile Mini’s stock price 

• 

Valuation of Mobile Mini’s stock 

• 

Investment recommendation

 

14 

background image

Valuation of MINI 

15 

• 

As the US economy is in mid-expansion phase, MINI’s earnings are close to another peak 
of a business cycle. Hence, I have projected another four years out to complete a full 
business cycle. As MINI is a cyclical stock with high leverage, a valuation based on EV/
EBITDA considers multiple scenarios including normalized assumptions to value MINI. 

• 

Base case scenario considers normalized Forward EV/EBITDA of 10.7x (also sellside consensus) 

based on 2006-2014 period (see appendix 5 for multiples in various phases of business cycle) with a 
probability of 60% 

• 

Best case scenario is based on highest Forward EV/EBITDA of 14.2x in Dec 2014 with a probability 
of 20% 

• 

Worst case scenario includes lowest EV/EBITDA of 7.2x in Dec 2008 with a probability of 20% 

• 

Since MINI’s EV has high component of leverage, a replacement value analysis will help in 
understanding MINI’s investment attractiveness from the point of a strategic acquirer. 

• 

As a final check, analysis of MINI’s stock price based on normalized earnings will help in 
ascertaining relevancy of other analysis. 

Assumptions 

Relevant 
methods and 
multiples 

background image

Valuation based on EV/EBITDA 

16 

background image

Valuation based on replacement value and normalized earnings 

17 

• 

Based on market rates, MINI’s entire asset base can be replicated for $1.3bn while 
MINI’s EV is $2.6bn. MINI’s replacement value raises the question whether one would 
pay 200% of liquidation value for an, at best, 4% return on asset business. 

• 

Importantly for the downside case, MINI’s leverage creates a situation where high 
enterprise value and relatively smaller market capitalization (about 70% of EV) can 
affect equity owners, in case of macro or company-specific events.   

• 

Given high expectations for 50% of EBITDA margin, MINI is trading at 17x EBITDA, 
which is hugely expensive for a commodity business at mid cycle earnings, considering 
the low returns and the leverage.  

• 

MINI’s average revenue for last six years is about $387mn and operating income is about 
$94mn, with an average operating margin of 24.2%. 

• 

To estimate MINI’s cost of equity, I used a bottom up beta (estimated from the packaging 
and container industry) of 0.95. Using the treasury bond rate of 2.17% as the risk free rate 
and an equity risk premium of 5.7%, I computed a cost of equity of 7.6%.  

• 

Since MINI has high leverage, I used management’s guidance of 4x EBITDA for debt 
portion. MINI’s existing rating of B2 has pre-tax cost of debt as 7.7% and tax of 39.4%. 

• 

MINI’s existing market capitalization is about $1.8bn and its debt based on 4x 2015 
EBITDA is about $790mn. MINI’s cost of capital is about 6.72%. 

• 

Applying MINI’s normalized operating margin to 2018 revenues gives $158.6mn, an 
estimate that captures both the larger scale of the firm today and its performance over the 
years. Since MINI is a mature industry, I assumed 3% growth rate to arrive at 44% stable 
period reinvestment rate. These assumptions returned MINI’s value as $15/share. 

Replacement 
value 

Normalized 
earnings 
valuation 

background image

Agenda 

• 

Business description 

• 

Evaluation of Mobile Mini’s business 

• 

Scenario embedded in Mobile Mini’s stock price 

• 

Valuation of Mobile Mini’s stock 

• 

Investment recommendation

 

18 

background image

Investment recommendation 

19 

• 

MINI’s unit economics is misleading on portable storage fleet while they do not disclose 
information about other assets in the fleet, which might have much worse economics. 
Also, standalone economics of MINI’s ETS acquisition seems to be worse than MINI’s. 

• 

MINI has levered itself immensely to roll-up competition to grow while paying 
significant premium (as witnessed by goodwill) and then spending significant money on 
refurbishing used ocean going containers. MINI’s business is extremely capital and asset 
intensive, which highlights return on assets as the best measure. MINI’s ROA does not 
even earn MINI’s cost of capital. 

• 

MINI’s earnings are not a good measure as MINI’s depreciation schedule is next to 
nothing. 

• 

Based on multiple methods, MINI’s stock price target ranges from $28-$15, showing 
about 30-60% decline from existing level. 

• 

In the best case scenario, MINI’s stock can reach $44, if MINI can grown its EBITDA by 
15% each year, which is a highly unlikely scenario. 

• 

Upside/Downside ratio for MINI does not justify investing in the stock as on the upside 
MINI can capture 11% of gain while can lose 90% of value on the downside. 

Sell 
recommendation 

background image

Investment recommendation: Catalyst and risks 

20 

• 

Rent-rolls leading to higher churn within MINI’s existing customers. 

• 

Change in interest rates can lead to higher cost of debt for floating rate portion of MINI’s 
debt. MINI’s acquisition strategy will also lose attraction as assets might not have great 
unit economics without cheap leverage.  

• 

MINI’s asset appraisal can create problem with the lender as the fleet comes in below 
value due to reduced valuations on fleet. Goodwill impairment decreases their book 
value. Negative covenants prevent them from needed capital expenditures. Given MINI’s 
tangible book value is only 40% of MINI’s book value, any impairment in goodwill or 
revaluation of MINI’s fleet should have a significant impact on their stock price. 

• 

Management’s 50% EBITDA margin never materializes as high competition, ageing 
fleet, and worse units economics of higher price units put a drag on MINI’s EBITDA. 

• 

ETS acquisition ends up forcing MINI to write-off goodwill because of unrelated sector 
exposure and macro overhang. 

Catalyst 

• 

MINI can be an acquisition target. However, with 4% earnings yield, the economics for a 
strategic or PE buyer does not look lucrative. Moreover, there are very few companies in 
package and container industry who have the size to acquire MINI. 

• 

Management can keep paying high dividend to attract investors. However, as MINI is 
CAPEX intensive, continuing high dividend can not be a sustainable strategy , especially 
with high leverage. 

• 

Involvement of an activist investor can bring in a new set of investor which can keep the 
momentum going for some time. 

Risks 

background image

Appendix 1: Price comparison of mobile storage providers 

21