Mobile Mini provides temporary storage units on a monthly rental basis to the retail, construction, consumer, and industrial markets. The units are essentially refurbished ocean storage containers that sit behind your store or on the construction site to provide temporary storage. Mobile Mini also manufactures containers but has migrated from sales to leasing over the last several years. The containers lease fleet has grown from 13,600 units at year end 1996 to 77,000 as of the end of 2001, or 39% CAGR. This fleet expansion has been funded by debt and equity sales. A combination of “rolling up” small players and purchasing used containers has fueled the “growth”. There is $162.4 million in debt outstanding, which is secured by the lease assets. There are 14.2 million shares at $39.00 so the EV is $717.0 million. Trailing EBITDA is $48.8 million and eps were $1.34 so the multiples are 14.7 on an EV/EBITDA basis, and 29.1 on a P/E basis. The lease asset, which represents the depreciated value of the lease fleet, is carried at $277.0 million or $3,900. per container. The short thesis has three main points: (1) there is a glut of used containers coming off lease and available for sale and rental. The Gulf war period, new leasing programs and years of trade deficits have left a huge overhang of containers sitting in storage. Ports in California have outlawed the practice of Asian shippers leaving empty containers due to a lack of available storage space. A quick drive down the NJ Turnpike shows the glut of containers on the east coast. After calling several dealers of used containers I believe pricing has dropped from the $1,200 range (40 ft.) to as low as $800. and still has not stabilized. The implication of this drop is two fold for Mini; first the lease asset, which they have borrowed against, is vastly overstated. It is hard to get to a value of $3,900 when a used container can be purchased at $800. Paint, locking system and transportation could get you to $2,000. per container if you stretched. This lease asset of $3,900/container is hard to reconcile with the current environment. Furthermore, there is no clear driver that would change the fundamental supply/demand equation except for a ground war (supply decreased during the Gulf War), or a major shift in the trade balance. The second issue is pricing. Shipping companies have entered the market to rent containers directly to the big customers at a steep discount to Mobile Mini’s price. It is not hard to win a pure commodity sale from Wal-Mart or Kmart based upon price. Anecdotes from the market suggest that such customers are being offered storage at $60-$70 per month vs. the current $120. being charged on average by Mobile Mini. (2) I believe earnings per share are vastly overstated by Mini’s depreciation policy and do not represent the true economics of the business. The lease assets are depreciated to 70% of original cost over a 20-year period or at 1.5% per year. Included in the lease asset cost is the transportation cost to one of Mini’s locations, purchase price, paint and fixtures. The income statement sees virtually no COGS from the lease asset. Using a 10-year straight line (or the 5 year straight line they use for tax purposes) would reduce reported eps by approximately 90%. The company argues that containers “last forever” and therefore 1.5% per year is ok. This argument ignores the fact that the current value of these containers is today substantially below stated value. How the accountants (Arthur Anderson, Arizona office) can approve this should not be a surprise given the other creative accounting they have approved recently. I do believe it will be harder to justify these practices going forward. I also believe at some point the lenders will “wake up” to the true value of the collateral. (3) The management does not appear to be the most “up and up” guys around. The 10K reveals: “The Company leases a portion of the property comprising its Phoenix location and the property comprising its Tucson location from Richard E. Bunger’s five children. Mr. Bunger is an executive officer, director and founder of the Company. Annual base payments under these leases total approximately $66,000 with an annual adjustment based on the Consumer Price Index.” And “Additionally, the Company leases its Rialto, California facility from Mobile Mini Systems, Inc., a corporation wholly owned by Mr. Bunger, for total annual base payments of $204,000, with annual adjustments based on the Consumer Price Index. The Rialto lease is for a term of 15 years, expiring on December 31, 2011.” And “The Company obtains services throughout the year from Skilquest, Inc., a company engaged in sales and management support programs. Skilquest, Inc. is owned by Carolyn Clawson, the daughter of Richard E. Bunger and sister of Steven G. Bunger, the Company’s President and Chief Executive Officer. The Company made aggregate payments of approximately $85,000 and $131,000 to Skilquest, Inc. in 1999 and 2000, respectively, which the Company believes represented the fair market value for the services performed.” These transactions may be at fair value and “arm’s length”, and they are disclosed. But what kind of management and board would allow such transactions to occur for appearance purposes alone?
It is not easy to arrive at a target price for Mobile Mini. Rapid growth through value destroying transactions does not deserve a high multiple. If you put an 8 multiple on the trailing EBITDA (lofty for a low/no growth industry with overstated EBITDA) the equity would be worth around $16.00 which I believe would be a generous valuation. Another approach would be to look at the lease asset on a more realistic valuation basis. At $2,000 per container, book value falls from $11.22 per share to $2.54 per share. Earnings are really not there using industry comparable depreciation practices. I believe these shares are significantly over valued and will decline 50 to 75% from current levels.
I see three catalysts: (1) pricing will fall as storage containers find the best economic home. I believe this process is already in full swing which will result in an earnings miss. (2) the banks may wake up to the questionable value of their collateral and require more of a risk premium or limit the company’s access to the debt markets. (3) the accountants may actually force a review of SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under SFAS No. 121, long-lived assets and certain identifiable intangible assets to be held and used in operations are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. The nice thing about shorting a roll-up is that any sign of trouble has the double effect of lowering the growth rate and lowering the multiple. Access to the equity and debt markets sustain the growth of this company – if capital becomes expensive it all comes apart very quickly.