Despite some worries early in the week, the bulls once again bought the dip, and pushed the indexes near all-time highs. For the week, the S&P 500 and Dow gained approximately 1.35%, and the Nasdaq rallied 1.7%.
The Stock – WillScot Mobile (WSC)
Why the Strength
Non-residential construction is on a roll, with the U.S. Labor Department’s numbers for January showing a notable sector-wide expansion across several key metrics—including the 10th straight month of jobs added. With new construction comes a corresponding demand for mobile space solutions such as contractors’ offices, canteens, workshops and other accommodations, and that’s where WillScot enters the picture.
The company sells and leases mobile offices and portable storage units with basic furniture and appliances, as well as modular classrooms and other temporary space solutions. Its customers span a wide range of industries, from commercial and industrial to government and other end markets, with over 350,000 mobile office trailers across a network of 270 North American branches.
Last week, WillScot shook up the industry after it announced an agreement to acquire McGrath RentCorp, a leading temporary space solutions rental provider, in a deal valued at nearly $4 billion, which is a big chunk (north of 40%) of the current market cap. WillScot expects the combined company will generate approximately $700 million of annual free cash flow by the end of the first full year following closing, with “significant” further free cash flow margins over time. The deal is being viewed by analysts as an integral part of WillScot’s preparation for an ongoing expansion of government-funded infrastructure projects across the country (a result of the 2021 Infrastructure Investment and Jobs Act).
Of course, business was already solid and very profitable: Last year, WillScot saw persistent rental demand across its commercial, education and portable storage customer bases, and in Q3, it generated free cash flow of $148 million—up a whopping 77% year-on-year and north of 70 cents per share, well above reported earnings. It’s a solid long-term growth story and the McGrath move should be a big boost.
Technical Analysis
WSC rallied to new all-time highs early last year, but with growth about to slow, the stock topped in March near 52 and slipped jaggedly down to 34 into the market’s October low. The initial rebound was decent (including four solid up weeks on above-average volume), followed by a modest five-week rest period. And then came the McGrath announcement, which caused the stock to soar last week on its heaviest week of volume since 2021! Stop — 43.5
The Covered Call Trade
Buy WillScot Mobile (WSC) Stock at 50, Sell to Open March 50 Strike Calls (exp. 3/15) for $2, or a Net Price of 48 or less
Static Return: $200 per covered call (4.16%)
Breakeven: 48
Covered Call Return (if assigned): $200 per covered call (4.16%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 48 or less. (In this case 50 minus 2 = 48. Or another example is you could pay 49.90 for the stock and sell the call for 1.90, which also equals 48)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on February 13, 2024.
Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.
