Is Mobile Mini (MINI) Turning Capital Spending into Profits? (V)

I expect this to be my final post in this series on the portable storage leasing company, Mobile Mini (MINI).

In prior posts, we have seen that both a) data from container sales by the company, and b) regular appraisals (when appraisal dates and book value dates are property aligned), support the negative statement that "The lease fleet does not appear to be overvalued on the books, and the company does not appear to be capitalizing costs that should be expensed." We have also identified the mechanism--discretionary capital spending on expensive additions to the lease fleet--that accounts for the period-to-period rise in net book value per unit.

The question for this post is: How effective has Mobile Mini's management been in turning this capital spending into profits?

As measured by total-dollar top-line and bottom-line operating figures, growth of the company’s leasing business is accelerating again, following the recession-driven slowdown in 2002 and 2003:

TOTAL-DOLLAR FIGURES

Leasing Revenue (in $ mil.): Q1, Q2, Q3, Q4 (YOY Changes)
2000: 15.1, 18.2, 20.5, 22.3
2001: 21.1, 23.7, 26.2, 28.6 (40%, 30%, 28%, 28%)
2002: 25.1, 27.6, 30.9, 32.6 (19%, 16,%, 18%, 14%)
2003: 29.7, 30.9, 32.8, 35.1 (18%, 12%, 6%, 8%)
2004: 32.1, 35.7, 38.9, 43.1 (8%, 16%, 19%, 23%)

EBITDA (in $ mil.): Q1, Q2, Q3, Q4 (YOY Changes)
2000: 7.4, 8.7, 10.0, 11.2
2001: 10.0, 11.6, 13.1, 14.2 (35%, 33%, 31%, 27%)
2002: 11.9, 12.4, 13.9, 15.4 (19%, 7%, 6%, 8%)
2003: 12.1, 13.0, 15.1, 15.7 (2%, 5%, 9%, 2%)
2004: 13.2, 15.6, 18.0, 20.4 (9%, 20%, 19%, 30%)

However, since at the same time the lease fleet has been growing both in number of units and in net book value per unit:

Number of Units (in thousands): Annual Year-End (YOY Change)
2000: 55.5
2001: 70.1 (26%)
2002: 83.6 (19%)
2003: 89.5 (7%)
2004: 100.6 (12%)

Net Book Value Per Unit:
2000: $3,532
2001: $3,953 (12%)
2002: $4,030 (2%)
2003: $4,277 (6%)
2004: $4,490 (5%)

with variable lease fleet utilization:

Lease Fleet Utilization: Q1, Q2, Q3, Q4 (Annual Average)
2000: 82.5%, 85.0%, 85.0%, 88.0% (85.3%)
2001: N/A, N/A, N/A, N/A (82.5%)
2002: 75.9%, 77.5%, 78.0%, 84.2% (79.1%)
2003: 75.5%, 77.3%, 78.4%, 83.3% (78.7%)
2004: 76.2%, 78.7%, 81.5%, 85.6% (80.7%)

we really need to look at growth of relevant ratios (per-unit-on-rent and revenue-to-NBV) to measure the underlying efficiency of the business:

PER-UNIT-ON-RENT FIGURES

Leasing Revenue Per Month Per Unit On Rent (in $): Q1, Q2, Q3, Q4 (YOY Changes)
2000: 158, 166, 168, 160
2001: 157, 164, 168, 162 (-0.6%, -1.5%, 0.5%, 1.6%)
2002: 155, 159, 168, 157 (-1.2%, -2.6%, -0.3%, -3.3%)
2003: 156, 156, 160, 158 (0.5%, -2.4%, -4.7%, 0.8%)
2004: 156, 164, 167, 170 (0.0%, 5.3%, 4.2%, 7.1%)

EBITDA Per Month Per Unit On Rent (in $): Q1, Q2, Q3, Q4 (YOY Changes)
2000: 77, 79, 82, 80
2001: 74, 80, 84, 81 (-3.9%, 0.9%, 3.0%, 0.5%)
2002: 73, 72, 75, 74 (-1.2%, -10.6%, -10.3%, -8.0%)
2003: 63, 65, 74, 71 (-13.6%, -8.6%, -2.5%, -4.6%)
2004: 64, 72, 77, 80 (0.9%, 9.4%, 4.7%, 13.3%)

REVENUE-TO-NBV FIGURES

Ratio of Leasing Revenue (Annualized) to Net Book Value: Q1, Q2, Q3, Q4 (YOY Changes)
2000: 0.47, 0.50, 0.50, 0.48
2001: 0.42, 0.44, 0.43, 0.43 (-12%, -13%, -12%, -11%)
2002: 0.36, 0.37, 0.39, 0.39 (-15%, -14%, -10%, -8%)
2003: 0.35, 0.35, 0.36, 0.37 (-2%, -6%, -8%, -6%)
2004: 0.33, 0.36, 0.37, 0.39 (-5%, 2%, 3%, 5%)

Ratio of EBITDA (Annualized) to Net Book Value: Q1, Q2, Q3, Q4 (YOY Changes)
2000: 0.23, 0.24, 0.24, 0.24
2001: 0.20, 0.21, 0.22, 0.21 (-15%, -11%, -10%, -12%)
2002: 0.17, 0.17, 0.18, 0.19 (-15%, -22%, -19%, -13%)
2003: 0.14, 0.15, 0.17, 0.17 (-16%, -12%, -6%, -11%)
2004: 0.14, 0.16, 0.17, 0.18 (-4%, 6%, 4%, 11%)

The above figures exhibit the following growth trends:

1. Total-Dollar Amounts: From single-digit lows in 2002 and 2003, leasing revenue and EBITDA growth have picked up during the past year, reaching 20% to 30% growth during the past two quarters. The margin (EBITDA/leasing revenue) of the business is also improving, with EBITDA (30% growth in 2004Q4) accelerating faster than leasing revenue (23% growth in 2004Q4).

2. Leasing Revenue Per Unit On Rent: Backing out the growth in the size of the lease fleet by looking at per-unit-on-rent figures, we find that growth of both leasing revenue and EBITDA (per unit on rent) turned negative in 2002 and 2003. During 2004, growth picked up, and by 2004Q4, leasing revenue per unit on rent was growing at 7% and EBITDA per unit on rent was doing even better at 13%.

3. Ratio of EBITDA to Net Book Value: Correcting also for increases in net book value per unit coming from the increased number of more expensive containers management has been adding to the fleet, we find that growth of both revenue/NBV and EBITDA/NBV had been strongly negative during 2001 and 2002. During 2003, this negative trend began to ease up, and by 2004Q2, both leasing revenue/NBV and EBITDA/NBV started to exhibit positive growth. In 2004Q4, leasing revenue/NBV grew 5% and EBITDA/NBV grew 11%.

In short, examination of the top-line and bottom-line operating figures reveals that the recent acceleration in growth is coming from ALL of the following sources:

a) Increase in the number of units in the lease fleet;
b) Increasing lease fleet utilization;
c) Increase in average leasing revenue per unit on rent;
d) Increase in average leasing revenue per dollar of net book value.

During 2002 and 2003, revenues and EBITDA grew with the increase in the number of units in the lease fleet, but utilization was deteriorating, rent per unit was falling and rent per dollar of capital invested in the lease fleet was plummeting even faster. It appeared that the company’s investment in its lease fleet was producing excess capacity but no longer generating profits.

However, during the course of 2004, operations have turned around: total-dollar revenue, utilization, rent per unit, and rent per dollar of capital invested are all growing. For the first time in at least four or five years, the company’s leasing business is “accelerating on all four cylinders” (cf., items a through d above). This acceleration suggests that money the company has been pouring into capital spending on refurbishment, customization and purchases of both generic ISO containers and more expensive manufactured units is finally driving higher profits. Not only are more expensive units being added to the lease fleet (increasing net book value per unit), the fleet has also begun to perform with increasingly higher productivity (accelerating ratios).

The above trend in fundamentals is clearly reflected in the company’s stock price, showing a sharp dip in 2002, the year when EBITDA growth slowed markedly:

Year: Closing Stock Price at Year-End (% YOY return), Diluted EPS, Year-End P/E
2000: 23.0 (7%), $1.11, P/E = 21
2001: 39.12 (70%), $1.34, P/E = 29
2002: 15.67 (-60%), $1.26, P/E = 12
2003: 19.72 (26%), $0.41, P/E = 48
2004: 33.04 (68%), $1.40, P/E = 24
2005: [38.01 as of 13-Apr-2005 (15% YTD)], [$1.83 (consensus est.)], [P/E = 21]

In my opinion, with business fundamentals accelerating, Mobile Mini will most likely continue to surprise on the upside for the next few quarters. From a valuation point of view, I find the PEG of 0.68 (based on 31% YOY forecast EPS growth from 2004 to 2005) attractive. Near-term, I see more reasons to be long than short this stock.