I bumped up my position in Mobile Mini (NASDAQ:MINI). It represents the most compelling risk-reward profile of any stock I own at the current price. I may actually take the weight up further.
While a little smaller in capitalization than I usually buy, it is the kind of company I like to own because its business model is simple and easy to estimate. Estimating the value of MINI is not a complicated exercise (not as complicated as analyzing most other companies, anyway).
Mobile Mini (MINI) provides storage solutions to businesses. They rehabilitate shipping containers, converting them into storage units that can be placed onsite at a business that needs extra storage. They also build mobile offices with similar characteristics. The steel containers, if maintained, have almost indefinite lives. Thus, these units represent annuities for the company, as they purchase and convert the units and then receive rent indefinitely. The alternative for customers is usually truck trailers, but those are of lower quality and tend to suffer more from wear and tear.
MINI issued a revision of its 3rd and 4th quarter earnings guidance, lowering its forecasts. The company release states, "The primary reasons are higher than expected fleet repair and maintenance expense and costs incurred in connection with reducing the scope of certain U.S. manufacturing operations..." This language implies that the higher costs are a result of charge-offs they are taking against equipment. It could also mean that they are taking back some rentals early and refitting them for new customers, thereby incurring higher costs.
If that is the case, then the company is seeing a slow-down in certain areas of their business that may last a few quarters, but is trying to take all of the earnings hit now. Given that revenues seem to be relatively unaffected, and the extra costs are temporary, the value of the stock is not materially affected.
The stock sold off partly because the language of the release is ambiguous. Regardless, there is nothing in the release or in the current economic conditions that gives me a reason to doubt my valuation estimate.
One critical risk I am taking is that the company is trying to hide deeper problems with the business, and that more serious bad news is waiting to be discovered. It is also possible that the company is more sensitive to economic conditions than I suspect, meaning that earnings have more to drop. While these are certainly possibilities, I have not yet uncovered any evidence to warrant such concerns.
I believe that the primary mistake I made here was underestimating the extra volatility related to a small cap stock. That means that I won't get as much of it as I would have gotten had I waited to make my purchases. Rats!
Disclosure: long MINI