A new elementary school for French immersion students is being built very close to where I live, a new elementary school is being built for French immersion students. During the day, the construction site is chock full of activity. The other day, I walked by and noticed a bunch of temporary offices supplied by Phoenix-based WillScot Holdings (WSC).
I lost track of the company after it merged with Mobile Mini in July 2020. The merger created a significant player in the North American modular space and portable storage solutions industry.
Since the merger's completion, WSC stock has been up 147%, suggesting that multi-billion-dollar mergers can deliver shareholder value.
Yesterday, after the close, WillScot reported Q3 2024 results. Investors did not like the news, and as a result, its shares were down 14% in midday trading Thursday as a result.
The company’s unusual options activity from Wednesday--it had five with Vol/OI ratios greater than 1.24-- puts my Buy theory to the test. Here’s why.
WillScots Unusual Options Activity
As I said in the intro, it had five unusually active options were traded on Wednesday, and two more are trading as I write this midday on Thursday. See if you can spot what stands out about these options.
Wednesday’s trading
Thursday’s trading
Have you figured it out? Except for the Nov. 15 $37.50 put, they all have DTEs (days to expiration) of 141 days or longer. Something’s going on. What could it be?
1) Today’s volume is 48,932, more than 3x the 30-day average.
2) Yesterday’s volume was 13,688, slightly below the 30-day average, but the day before, it was 125,648, about 8x the 30-day average.
3) Yesterday’s Put/Call Volume ratio was 0.92, which suggests a slightly bearish stance by options investors.
4) Today, the P/C Vol ratio is 0.04, which is completely the opposite. That tells me that investors are buying on the dip.
5) The March 21/2025 $40 call volume is 20,845, accounting for 43% of the volume so far today.
For now, let’s consider the fifth point.
The Options Time & Sales page shows that 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. I always refer to this percentage as the down payment to buy 100 shares. It’s not really. If you exercise your right to buy 100 WillScot shares in March, the total cost would be $41.80 a share, your breakeven.
Looking at the LongCall/Put page, your current breakeven is $41.65 based on a $1.65 ask. 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 brings me to the Buy theory I’ve been messing with recently.
You Like WillScot’s Business and Stock
Forget the fact 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.
Here’s what CEO Brad Soultz had to say 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. 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.
I look at it this way: WillScot expects adjusted free cash flow of $576 million in 2024, which is basically flat compared to a year ago. However, its long-term target of $700 million remains on track.
To reach $700 million without revenue growth, it would have to generate a free cash flow margin of 29.2%. In Q4 2023, it was 27.2% so that it could get there in 2025 with some focus.
But let’s say 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, and that’s without any revenue growth.
At the very least, its shares are fairly valued, but likely undervalued based on today’s dip.
It’s a tedious business, I’ll grant you, but a necessary one.
My Buy Theory
I was thinking about the following scenario.
What if you buy 100 shares of WillScot at the current price of $33.59? That’s an outlay of $3,359. Then, you sell a put with a strike price 20% below the current price ($26.87) and a call 50% above the current price ($50.39).
Looking at the seven unusually active options from yesterday and today, I see the April 17/2025 $27.50 put and April 17/2025 call $50. They seem to fit the bill.
Both are well out of the money. You would generate $160 in income from selling the put and call.
More importantly, you allow yourself to generate a little income while you wait for a better entry point for more shares, buying 100 at $27.50. However, if the shares jump higher in the next 5.5 months and you’re forced to sell your 100 shares at $50 (48% gain) on the covered call, you’re well ahead.
The only downside is if WSC shares fall to $20 or something crazy like that. They haven’t traded below $20 since November 2020.
Food for thought.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
