WillScot Holdings: Unlocking 26% Upside with Intrinsic Value Estimate

WillScot Holdings Corporation (NASDAQ:WSC) shares have been trading at a significant discount to their intrinsic value estimate, presenting an attractive investment opportunity for long-term investors. With an upside potential of 26%, WillScot's shares could be undervalued, according to recent analysis. This article explores the factors contributing to this discrepancy and assesses the company's intrinsic value estimate.

WillScot Holdings is a leading provider of onsite and on-demand space solutions in North America, offering mobile offices, ground level spaces, and other temporary structures. The company's earnings growth prospects and market position contribute to its intrinsic value estimate. Although WillScot's earnings declined over the past year, analysts forecast a faster growth rate than the American market. Additionally, the company's P/S ratio and estimated fair value suggest good value, despite debt not being well covered by operating cash flow and slower revenue growth than the American market.

Analysts' recommendations and price targets play a crucial role in the perceived undervaluation of WillScot's stock. The average analyst rating for WSC is 'buy' with a mean price target of $42, indicating a 26% upside from the current stock price of $33.8. This consensus suggests that analysts believe WSC is undervalued, supporting the intrinsic value estimate. However, individual analyst opinions vary, with some targets as high as $50. By considering the range of analyst opinions and price targets, investors can gain a more comprehensive understanding of WSC's potential undervaluation and make informed investment decisions.

WillScot's debt levels and cash flow management also impact its intrinsic value and the 26% discount. With a Debt/Equity ratio of 3.70 and Debt/FCF of 10.55, WillScot's debt is not well covered by its cash flow, indicating potential risks. However, its strong operating cash flow of $602.05 million and free cash flow of $476.95 million in the last 12 months suggest robust cash generation. The company's ability to manage its debt and maintain positive cash flow is crucial for maintaining its intrinsic value and reducing the discount.

Intrinsic value estimates for WillScot vary significantly depending on the valuation method used. The Discounted Cash Flow (DCF) method, which considers future cash flows and discounts them to their present value, estimates an intrinsic value of $42.07 per share, indicating a 24.30% upside from the current stock price of $33.84. This estimate is based on a growth exit model with a 5-year time horizon. However, other valuation methods provide different insights. The Price-to-Earnings (P/E) ratio, which compares the stock price to earnings per share, has a range of 2.90 to 45.74, with a current P/E of 20.39, suggesting a potential discount of 39.8%. The Enterprise Value-to-EBITDA (EV/EBITDA) ratio, which considers the company's total value relative to its earnings before interest, taxes, depreciation, and amortization, has a range of 29.78 to 52.11, with a current EV/EBITDA of 44.65, indicating a potential premium of 31.9%. These varying estimates highlight the importance of considering multiple valuation methods when assessing a company's intrinsic value.

The intrinsic value estimate for WillScot is based on a discounted cash flow (DCF) analysis, which involves several key assumptions. The most critical assumptions include the future free cash flow (FCF) growth rate, the discount rate, and the terminal growth rate. The DCF model estimates the present value of future cash flows, discounted at a rate that reflects the risk of those cash flows. In this case, the analyst assumes a FCF growth rate of 4.96% in 2022, declining to 2.23% by 2031. The discount rate used is 8.0%, which is based on a levered beta of 1.281. The terminal growth rate is assumed to be 2.0%, reflecting the long-term growth prospects of the company.

To assess the sensitivity of the valuation to changes in these assumptions, we can perform a sensitivity analysis. For example, if we increase the FCF growth rate to 5.5% in 2022, the intrinsic value estimate would increase to $43.50 per share. Conversely, if we decrease the FCF growth rate to 4.4% in 2022, the intrinsic value estimate would decrease to $39.20 per share. Similarly, changes in the discount rate and terminal growth rate would also impact the intrinsic value estimate.

In conclusion, WillScot Holdings Corporation shares are trading at a significant discount to their intrinsic value estimate, with an upside potential of 26%. The company's earnings growth prospects, market position, debt levels, and cash flow management all contribute to this discrepancy. Analysts' recommendations and price targets also support the perceived undervaluation of WSC's stock. By considering the range of valuation methods and the sensitivity of the intrinsic value estimate to key assumptions, investors can make informed decisions about WillScot's investment potential.