A new elementary school for French immersion students is being built near where I live. The construction site is full of activity during the day. Recently, I noticed a bunch of temporary offices supplied by Phoenix-based WillScot Holdings (WSC). I lost track of the company after its merger with Mobile Mini in July 2020. This merger created a major player in the North American modular space and portable storage solutions industry. Since the merger’s completion, WSC stock has been up 147%, indicating that multi-billion-dollar mergers can deliver shareholder value. Yesterday, after the close, WillScot reported Q3 2024 results.
Investors reacted negatively to recent news, causing WillScot’s shares to plummet 14% during midday trading on Thursday. The unusual options activity observed on Wednesday, with five options having Vol/OI ratios greater than 1.24, is testing my Buy theory. Let’s delve into the details.
WillScot’s Unusual Options Activity
As mentioned earlier, WillScot had five unusually active options trades on Wednesday, with two more occurring on Thursday midday. Notably, all options except for the Nov. 15 $37.50 put have DTEs (days to expiration) of 141 days or longer. This is a significant observation.
Trading Activity on Wednesday and Thursday
Yesterday, the Put/Call Volume ratio was 0.92, indicating a slightly bearish stance by options investors.
Today, the P/C Vol ratio is 0.04, which is completely opposite. This suggests that investors are buying on the dip. The March 21/2025 $40 call volume is 20,845, accounting for 43% of the volume so far today. Looking at the Options Time & Sales page, about 90% (18,833) of the volume is on one trade at 10:39. The trade was at $1.80, or 4.5% of the $40 strike. This percentage is often referred to as the down payment to buy 100 shares. However, if you exercise your right to buy 100 WillScot shares in March, the total cost would be $41.80 a share, which is your breakeven. Based on a $1, your current breakeven on the LongCall/Put page is $41.65.The ITM probability is 24.51%. To double your money by selling the call before it expires in March, WillScot’s shares must appreciate by $5.32 (15.9%) in the next 141 days. I like its chances, which leads to the Buy theory I’ve been working on recently. Forget that its shares are down double digits in today’s trading and focus on its business. Sales are slightly up for the first nine months of 2024 to $1.79 billion from $1.75 billion a year earlier. Its adjusted EBITDA and adjusted free cash flow are also up marginally. CEO Brad Soultz said about the third quarter: ‘Headwinds in non-residential construction impacted top-line revenue, particularly among smaller scale and rate sensitive customers. In contrast, we continue to see steady demand across larger projects and strong backlogs among our national accounts and general contractors.’
WillScot expects adjusted free cash flow of $576 million in 2024, basically flat compared to a year ago. Its long-term target of $700 million remains on track. To reach $700 million without revenue growth, it would need a free cash flow margin of 29.2%. In Q4 2023, it was 27.2%. If it gets halfway there in 2025 and generates $638 million in free cash flow, that’s a free cash flow yield of 5.7% based on its current enterprise value of $11.21 billion, without any revenue growth. At the very least, its shares are fairly valued but likely undervalued based on today’s dip. And we anticipate that the overall operating environment will only benefit from interest rate and political certainty, so the business looks to improve heading into 2025.
Investing in WillScot Mobile Mini Holdings Corp can be a tedious yet necessary endeavor. Here’s a scenario to consider: Imagine purchasing 100 shares of WillScot at the current market price of $33.59, which amounts to an investment of $3,359.
To enhance returns, you might sell a put option with a strike price set 20% below the current price, at $26.87, and a call option at 50% above the current price, at $50.39. This strategy is supported by the unusually active options observed for April 17/2025, specifically the $27.50 put and $50 call. Both options are significantly out of the money, offering the potential to generate $160 in income from selling them.
This income-generating strategy not only provides a little income while waiting for a better entry point to buy more shares at $27.50 but also sets you up for potential gains. If the share price rises above $50 within the next 5.5 months, you would be obligated to sell your 100 shares at this higher price, resulting in a 48% gain.
The only downside would be if WSC shares drop to $20 or something extremely unusual like that. Since November 2020, they haven’t traded below $20.
