Rush Enterprises – Buy In For The Long Haul?

Rush Trucks 8Rush Enterprises, Inc. (NASDAQ:RUSHA) is a retailer of commercial vehicles and related services. The company operates a regional network of commercial vehicle dealerships under the name Rush Truck Centers. The company, through its Rush Truck Centers, offers services, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products. Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird. At its Rush Truck Centers, the company offers third party financing to assist customers in purchasing new and used commercial vehicles.

Rush Truck 1

Although 67% of total revenues come from Truck Sales, it only makes up 28% of gross profits. Conversely, Parts and Services is 28% of total revenues but 64% of gross profits. The Parts and Services segment is the most important part of the business.

Retail Truck Sales and Servicing Markets


Rush sells several different types of trucks. The heaviest trucks are class 8 trucks. Medium grade trucks are classified as class 4-7. The company also sells used trucks. Rush has a fair amount of exposure to the oil and gas industry through its sales of class 8 trucks. The dip in the price of oil over the last 18 months has negatively affected their business. However, the company has significantly diversified its sales by entering into the construction industry over the last ten years. This move has helped insulate their truck sales during the recent downturn in the price of oil.

Rush uses A.C.T Research Co. LLC, a truck industry data and forecasting service provider to help them forecast truck sales.  According to A.C.T Research, U.S. Class 8 retail sales are estimated to total 222,000 units in 2016, a 12.2% decrease compared to 253,000 units in 2015. This slowdown in sales is related to the slowdown in the oil and gas industry. Below is the historical class 8 retail sales.

Rush Trucks 2

The decline in class 8 sales might be scaring off investors. However, looking back at previous cycles, Rush has noted that slowdowns in truck sales translate into pent up demand. The graph above is a perfect example of this phenomenon. The slowdown from ’07-’10 created pent up demand that has been working off over the last five years. The slowdown in the oil and gas industry might cause these companies to put off replacing trucks but they will inevitably be replaced.

Parts and Service

The most important piece of the business is the servicing of trucks previously sold. Parts and Service is high margin recurring revenue. Blended gross margins on aftermarket services operations are expected to range from 36.5% to 37.0% in 2016. Rush Enterprises expects the parts and services to grow at mid single digits in 2016. The company is focused on growing this part of the business. The reason they sell trucks is so they can service them later. Current growth initiatives include expansion of product and service offerings that complement their primary product lines.

Telematics

Rush is taking advantage of technological advances to have the ability to service vehicles while they are out on the road. This is accomplished by using telematics. Trucks will now receive software updates without having to take up a servicing bay. This will provide space for additional trucks needing service. Gross margins on service and body shop operations historically have ranged from 67% to 68%. Having additional bays available increases the total number of trucks being serviced along with trucks receiving service and body shop operations. This high margin business could boost the blended gross margins on aftermarket service operations well above the current 37%.

Absorption Ratio

The company tracks the ratio of gross profit from the parts, service and body shop departments of a dealership to the overhead expenses of all of a dealership’s departments. This is just another way of showing operating leverage. They have done very well and with their long-term growth strategies I would think they will continue to increase this ratio.

Rush Trucks 3

Competitive Advantages

A significant portion of the new commercial vehicle sales are to fleet customers. Because of the size and geographic scope of the Rush Truck Center network, their strong relationships with fleet customers and ability to handle large quantities of used commercial vehicle trade-ins, they are able to successfully market and sell to fleet 9 customers nationwide. The company believes they have a competitive advantage over most other dealers in that they can absorb multi-unit trade-ins often associated with fleet sales and effectively disperse the used commercial vehicles for resale throughout the dealership network. The broad range of services offered to purchasers of commercial vehicles at the time of purchase and post-purchase has resulted in a high level of customer loyalty.

Pricing is an important element of Rush’s marketing strategy. Because of their size, they benefit from volume purchases at favorable prices that permit them to achieve a competitive pricing advantage in the industry. Historically, the company has been able to negotiate favorable pricing and terms, which enables them to offer competitive prices for their trucks.

Dealership Agreements

Rush has non-exclusive dealership agreements with Peterbilt, International, BlueBird, Ford, Hino, Isuzu, Micro Bird and Mitsubishi Fuso. The two largest agreements are with Peterbilt and International. These two dealers account for half of the total revenues of the company. The dealerships compete with dealerships representing other manufacturers including commercial vehicles manufactured by Mack, Freightliner, Kenworth, Volvo, and Western Star. Peterbilt (owned by PACCAR) and International produce quality trucks that have customer loyalty. These agreements with companies possessing brand loyalty helps Rush in selling trucks. However, this is a double edged sword. If these manufactures are less successful in the future, this could have a direct impact on Rush.

Rush trucks 4

Industry Outlook

The U.S. retail truck market is affected by a number of factors relating to general economic conditions. The business is subject to substantial cyclical variation based on general economic conditions. However, infrastructure in the U.S. is aging and there will need to be a massive amount of construction spending over the next 20 years to repair or replace aging infrastructure. The construction market is expected to be one of the fastest growing markets over the next five years with a 5.2% CAGR.

Rush Trucks 5

Long Runway For Growth

Rush has about 100 truck centers across the U.S in 21 states. There is plenty of room for growth. See the screenshot below of current Rush Truck Centers.Rush Trucks 6

There are several large markets where Rush has no exposure today. The following information comes from the U.S Federal Highway Administration and the U.S Bureau of Transportation Statistics.

Rush Trucks 7

Looking at this, I think the only areas where Rush has good exposure is Southern CA, Texas, and Florida/Georgia. The company has significant growth opportunities in Northern CA, the Northwest, Northeast, Midwest, and South. Rush has no exposure to the Northeast and the Northwest. These regions have terrific potential. Refer below to see the DOT’s prediction of truck routes in 2040. Rush Trucks 8

There is going to be a lot of growth in major truck routes over the next 25 years. A lot of this growth will be in the Midwest region where Rush has a fair amount of truck centers. It looks like there will be opportunity to open quite a few more. Northern CA and the Northeast will also experience significant growth. Rush will have an opportunity to enter these markets.

Risks

There are several risks to the business that are worth addressing. 1) Slowdown in economic conditions. A general slowdown in the economy would not be good for Rush. Customers will continue to have their trucks serviced but sales could drop which would be bad for the stock. 2) Rush is dependent on PACCAR and Navistar for the supply of quality trucks and parts. Together, these two companies account for about 50% of total revenues. Rush needs PACCAR and Navistar to be successful in producing the best trucks on the road. Failure to renew an agreement with either PACCAR or Navistar could cause volatility in the stock price. 3) Peterbilt may terminate dealership agreements in the event of a change of control of the company. There are eleven individuals with Rush that are deemed the Dealer Principals. Collectively they have 30.33% of the voting rights. If the aggregated control drops below 22%, Peterbilt is allowed to terminate its agreement. It is unknown if Peterbilt would exercise their right in this circumstance but it is worth noting.

Financial Overview

Rush Trucks 7

Rush will need margin expansion in the next few years. With technological advancements and opening new service centers, there should be opportunities to grow margins. The servicing of trucks is where the company makes its money.

Leverage

The balance sheet indicates the company has a fair amount of leverage. The company has maintained about the same amount of leverage over the last five years as it has grown. The business is capital intensive so this isn’t a big surprise. I will be keeping an eye on their debt situation as I don’t want to see them become more levered, 1.8x is enough. However, the terms of the debt are favorable and they are not exposed to a potential rising interest rate environment in the U.S. Most of their debt is fixed and the variable portion is tied to LIBOR.

Valuation

The stock is down about 25% since last October due to the price of oil. I think the valuation is reasonable. The business is still small and has potential to grow. However, considering current profitability, I don’t know how they can grow without taking on more debt. This puts the company in a tough place considering the current valuation.

Bottom Line

Rush is an interesting business. As the business grows to sell more trucks it will also service more which is the most important part of the business. I would really be interested to know what percentage of trucks sold by Rush are serviced by them. Unfortunately, they don’t disclose this information. Going forward, I would like to see the business focus on current operations and becoming more profitable. However, the company’s strategy is to continue to expand and steal market share. I am not sure how they can do this without taking on more debt. I think the valuation is reasonable but I worry about the debt situation. The trucking industry is set to grow a lot over the next 25 years. I think Rush will be a part of it. If the balance sheet improves and the valuation remains stable, I think it would be an interesting company to own.

Disclosure


No Position

AMERCO – U-Haul Is On The Move

UHAUL 1

Company Overview


AMERCO (NASDAQ:UHAL) is a do-it-yourself moving and storage operator through its subsidiary U-Haul International, Inc. (U-Haul). The company supplies products and services to help people move and store their household and commercial goods. It operates through three segments: Moving and Storage, Property and Casualty Insurance, and Life Insurance. The Moving and Storage segment consists of AMERCO, U-Haul, and Real Estate and the subsidiaries of U-Haul and Real Estate. It consists of the rental of trucks, trailers, portable moving and storage unit, specialty rental items and self-storage spaces primarily to the household mover, and sales of moving supplies, towing accessories and propane. The Property and Casualty Insurance segment consists of Repwest and its subsidiaries and ARCOA. It provides loss adjusting and claims handling for U-Haul through regional offices across North America. The Life Insurance segment consists of Oxford and its subsidiaries and provides life and health insurance products.

Over 90% of the company’s revenues are derived from the moving & storage segment. This is my primary focus. A breakdown of this segment is shown below.

UHAUL 2

Market And Competitive Advantages


The truck rental and storage industries are competitive. However, U-Haul has over 50% of the market share. The two biggest competitors in truck rentals are the Avis Budget Group (NASDAQ:CAR) and Penske Automotive Group (NYSE:PAG). Neither of these competitors focus on the residential moving market like U-Haul does. The self-storage industry is also very competitive and is more fragmented. This industry is growing very quickly as demand for self-storage continues to rise. U-Haul has naturally entered into the self-storage and mobile storage markets in the last couple years. The company also has a product called U-Box that competes directly with PODS.

U-Haul has a long list of competitive advantages. Perhaps the two biggest are its 140,000 rental truck fleet and terrific real estate portfolio. UHAL is nearing 20,000 independent U-Haul dealers and has 1,600 company owned moving stores. These make barriers to entry very high for any new competitors. Additionally, U-Haul is the go-to brand for do it yourself (DIY) moving. The brand represents an affordable and reliable moving option. The company invests in the assets that matter. Most U-Haul locations are not fancy but they continually invest in the fleet to ensure the quality of the trucks exceed customer expectations.

The company is ramping up its exposure in the self-storage market. They have uncovered yet another competitive advantage. Current competitors in the self-storage space do not have a massive fleet of rental trucks. It is much easier for customers to rent a self-storage space at U-Haul than somewhere else. Customers can rent a truck, bring their belongings to their U-Haul self-storage room and then give the truck back. Customers are already going to rent a U-Haul truck so why not just rent a self-storage room there? It is starting to happen a lot. Capacity of self-storage rooms are over 90% which is higher than most of their competitors. This part of the business is growing quickly and has a lot of potential.

SmartStop Self Storage Acquisition


Last year SmartStop Self Storage was acquired by Extra Space Storage Inc. (NYSE:EXR), a competitor of U-Haul. SmartStop had 80,000 units and 10.5 million rentable square feet in 17 states and competed with U-Haul’s self-storage business.

Valuation

The valuation that SmartStop was purchased for is incredible. Below is a screenshot of selected financial data in their last 10-K.

UHAUL 4

As seen above, 2014 was the first year they had actually turned a profit. The company had revenues of about $100 million. In June 2015, it was purchased for $1.4 billion or 14x revenues. Seen another way, the company was purchased at almost 33x price to EBITDA.

By comparison, U-Haul operates 500,000 units and 45 million rentable square feet in 49 states and 10 Canadian provinces. This is over four times the size of SmartStop. At 14x revenues, U-Haul’s self-storage segment is worth more than $3 billion today. This segment only accounts for 8% of the company’s total revenue but is growing quickly. The market cap of UHAL is $7 billion. This means rest of the business is only worth $4 billion which is not right. It should be worth much more.

U-Haul continues to acquire and build self-storage facilities. Recently the company said that about 80% of the units are being built vs. acquired. Even as the number of units continues to grow quickly, the occupancy rate remains strong. This says a lot because the new units have a 0% occupancy rate and they are not dragging down the overall rate.

Analyst Coverage


Today, there is only one sell side analyst that covers the stock. This is surprising because there are smaller companies that have coverage from 10+ analysts. I believe the reason for the lack of analyst coverage of UHAL is due to the lack of trading liquidity. The three month average volume is only 55k shares a day.

This has been brought to management’s attention on multiple occasions. At last year’s annual meeting, they discussed a 7-for-1 stock split that had overwhelming support from shareholders. The issue was taken to be evaluated by a committee of the Board of Directors. This was announced last November and they have no commented on it since. I believe a stock split would be very beneficial for shareholders. Increased analyst coverage could shed light on the undervalued company and its future.

Warren Buffett has spoken out against stock splits on many occasions. He makes a terrific point. Mr. Buffett says lower-priced shares prompt short-term, speculative trading. He goes on to say “I don’t want anybody buying Berkshire thinking that they can make a lot of money fast.” Warren Buffett is a value investor and doesn’t want short-term traders speculating in Berkshire stock. However, in 1996 Berkshire issued much cheaper Class B shares and split them 50-for-1 in 2010 when Buffett used Berkshire stock to help pay for the $27 billion acquisition of Burlington Northern Santa Fe Corp. Putting this aside, I agree with Buffett’s original argument. However, I don’t see a lot of short-term traders being excited to speculate on UHAL at say $55 per share. I believe there are better stocks for short-term traders to speculate with. There are plenty of speculators trading Amazon at $700+ a share so I don’t think UHAL should worry too much about short-term traders.

Investment Thesis


 

  • An attractive business model with high margins and sustainable competitive advantages.

U-Hauls trucks are manufactured by Ford and General Motors. U-Haul trucks have their own design with low loading decks which make moving much easier. The company leases the trucks and then sells the trucks at the end of the capital lease. Historically, they have been able to sell these trucks at a net gain.

The net margins have continued to improve over the last few years as the company has entered into new segments. The self-storage segment is full of potential because of the growth and U-Haul’s value proposition.

  •  Macro trends support long-term growth in the business

Population densities have increased in the U.S. and there has been an increase in self storage awareness and development. In 1984 there were 6,601 facilities with 289.7 million square feet of rentable self storage in the U.S. In 2013, there were approximately 59,500 self storage facilities in the U.S. representing approximately 2.3 billion square feet. The self storage industry has been one of the fastest-growing sectors of the United States commercial real estate industry over the period of the last 30 years. I believe the “baby boomer” generation will have a major impact on the future of the self storage industry. During the 19-year period from 1946 to 1964, approximately 77 million babies, or “baby boomers,” were born in the U.S. According to the U.S. Census Bureau, “baby boomers” make up nearly 27% of the U.S. population. These “baby boomers” are heading towards retirement age and have accumulated possessions which they wish to retain. As the “baby boomers” move into retirement age and begin to downsize their households, I believe there will be a great need for self storage facilities to assist them in protecting and housing these possessions for prolonged periods of time.

  • Increased analyst coverage and attention to valuation

UHAUL 5

I believe the Board will approve a stock split as shareholders continue to push for it. I think this will be beneficial for shareholders as analysts initiate coverage and institutional investors take positions in the stock. UHAL is heavily discounted compared to the valuation of its self storage competitors. As the company continues to enter into the self storage business and steal market share, the market will notice of this variance. The current valuation is very reasonable considering the company has achieved a 7% CAGR over the last three years and the growth opportunities going forward.

Bottom Line


U-Haul is a terrific business with sustainable competitive advantages. The valuation is reasonable considering the growth they have achieved. The company has recently launched a new app that allows customers to rent equipment or storage. Many smaller companies do not have the resources to create a similar app. U-Haul continues to create competitive advantages that create value for shareholders. The company understands the importance of rotating its fleet of trucks to ensure the fleet is always running effectively. This is what really drives the business and management does a great job of managing this aspect. I think shareholders have a lot of things to be excited about going forward.

Disclosure


 

Long UHAL

 

General Motors – Value Trap?

GM headline

General Motors appears to be a sound investment. It has a 4.7% dividend yield and looks to be reasonably priced. The company manufactures Chevrolet, Buick, and Cadillac brands but could be facing a shift in consumer behavior. GM has made a big bet on China and has struggled thus far. Actually, the only market the company has done well in is the U.S. GM is a global brand that has been challenged outside of the U.S over the last five years.

Markets and Market Share


GM has four automotive geographic segments; North America, Europe, International Operations, and South America. The International Operations segment is primarily made up of China. About 72% of GM’s sales come from the U.S. However, the company is investing in boosting sales outside of the U.S. Europe accounts for 13% of sales followed by International Operations with 8% and South America with 5%.

The only segment that has seen moderate growth is the North America with 5.4% sales growth. The other segments saw steep double digit declines in 2015. International Operations declined 12.3%, Europe 15.9%, and South America saw a massive 40% dip in sales. Overall, automotive sales shrank 3.4% in 2015. This followed a lackluster 0.7% decrease in 2014 automotive sales.

Market share trends are also worrisome for investors. In nearly every market, GM is losing market share. The only market that saw increased market share was China which grew a mere 0.2%. In the current environment, GM is struggling and things might become more difficult with increased competition going forward.

Margins – Reversion To The Mean


GM has seen a trend of decreasing margins over the last six years.

GM Profit

The average profit margin over the last six years is about 10%. In 2015, GM’s boost in margins came from $11.3 billion in favorable “Other” cost variances. These favorable variances include a $6.9 billion net foreign currency effect. Without this $6.9 billion, the profit margin would have been a disappointing 7.3%. I would expect the profit margin around 7-8% in a normalized operating environment. However, the company’s 2016 guidance would infer they believe the Dollar will remain strong so the favorable foreign currency cost variances will continue to keep costs down and margins up. When this variance normalizes, earnings will decline and suddenly the company will not appear to be as cheap as it appears today. The company has identified $3.5 billion in cost efficiencies it hopes to achieve by 2018. If they are successful, it will help insulate them from the reversal of temporary favorable cost variances.

Competition And The Future of Cars


Competition in the automobile industry is heating up.

GM Competition

The interesting thing about this slide is it doesn’t mention GM’s traditional competitors like Ford (NYSE:F), Toyota (NYSE:TM), and Chrysler. The automobile industry is being disrupted by technology companies. GM recently invested $500 million in ride-sharing company Lyft in an attempt to gain exposure to the shifting market. Technology companies have been working on autonomous vehicles for several years. GM announced two months ago that they now have an autonomous vehicle department. They have given tech companies with better talent a three or four year head-start. Not good.

According to a study from the University of Michigan, only 77 percent of Americans held a driver’s license in 2014. That represents a five percent drop since 2008 and a ten percent drop since 1983. Although all age groups recorded losses in relation to license holders in 1983, among the youngest group the losses were continuous, without upturns in intervening years. If you would like to read the study you can find it here.

The invent of Uber and Lyft has only added momentum to these trends. I work with several people that have decided that it makes financial sense to not own a car. They can Uber to and from work each day for about $15. They don’t have car or insurance payments, parking problems, maintenance issues, or worries about gas prices. They also love the idea of having a personal driver on call 24/7. They don’t need to go to the store often because they use Amazon and almost everything is delivered. The graphic below is from a survey performed in 2014. I would argue this trend continues to gain momentum.GM Demand

For those of us who still own cars, we are using Uber and Lyft occasionally which keeps the miles off our own cars. Barron’s published a bullish article on GM and Ford a couple weeks ago. In the article, they cited that the average age of U.S vehicles is 11.4 years old. This might be true, however they did not mention 1) vehicles on the road today are of higher quality and are lasting much longer and 2) total vehicle miles driven peaked in late 2007 and flat lined for about 7 years (This data point has begun to increase over the last year due to low gas prices). There is no way to know how many miles are on these vehicles. Projections for total vehicle miles have been overestimating the data point for several years. Total vehicle miles

According to recent study performed by Deloitte, over a third of Millennials consider modes of transportation other than personal cars as the preferred means of travel. Nearly a third listed a combination of trains, light rail, buses, carpooling, car-sharing, ride-sharing, bicycling, bike sharing, and walking as common means of transportation. If you would like to read this study you can find it here.

PwC estimates that there are 600,000 fewer vehicles on the road in the U.S because of car-sharing. It is projected that 8 million people in the U.S will be sharing cars by 2020. Most researchers say that about 12 cars are lost for every car-sharing vehicle. The number of car-sharing users worldwide is forecasted to grow from 6.5 million people in 2015 at a compound annual growth rate (CAGR) of 32.0 percent to reach 26.0 million people in 2020. Forecasts for the number of cars used for car-sharing services indicate they will grow at a CAGR of 29.6 percent from 123,000 at the end of 2015 to 450,000 at the end of 2020. If 12 cars are lost for every car-sharing vehicle, there will be around 4 million less cars on the road in 2020 compared to today.

Self Driving and Autonomous Vehicles

Autonomous vehicles are coming sooner than most people think.

Self driving

It is important to note that self-driving does not mean autonomous. Self-driving cars in 2020 will be able to accelerate, brake and steer a car’s course without input from the driver. An autonomous car is defined as one in which the driver could be completely disengaged from a vehicle. In fact, the vehicle could move from one place to another without occupants.

According to Navigant Research, there will be 85 million autonomous vehicles on the road by 2035.

At this very moment, there are millions of cars sitting around without their owners in them. Technology companies recognize all of this excess capacity as an enormous opportunity. It is silly that we have so many cars sitting around doing nothing at any point in time. Almost every vehicle that is owned spends more time parked than being driven. Once autonomous vehicles are on the road, I think auto manufactures will be very challenged. Imagine a future in which a company brings a vehicle to you after you request it using your smartphone. Need a ride to Starbucks? A little inexpensive two-seater shows up. Want to buy some furniture? A long bed truck backs into your driveway. In this world, will you really want to pay for a vehicle that has limited capabilities when you could use a variety of vehicles whenever you need them? If you are going to work, the vehicle you take might be the one the family next door used to come home from dinner the night before.

In this environment, automobile manufactures will sell most of their vehicles to large companies with huge fleets. Today, when Ford and GM sell vehicles to rental car companies, the margins are awful. This could be the future of the auto manufacturing industry.

This is obviously a very long term view of the industry. However, GM isn’t exactly thriving in the current environment either. The company is leaner than it once was but faces shrinking margins and the loss of market share.

Valuation

The valuation is probably tricking a lot of investors. On a P/E basis, the company looks very cheap. However, I would caution investors who are buying the stock on a P/E basis. The 4.8x P/E looks attractive but as the temporary favorable cost adjustments reverse, earnings will normalize. From 2012-2014 the average EPS was $2.32. In 2015 it jumped to $5.91 due to the favorable cost adjustments. Using normalized earnings, the stock is fairly expensive considering they have negative growth and a difficult future filled with new competitors.

Berkshire Hathaway 

The Berkshire Hathaway annual meeting was last weekend and it is always special to hear from Warren Buffett and Charlie Munger. Their insights are incredibly valuable and fascinating. I was reviewing the Berkshire portfolio and I noticed GM was in it. After doing a little research, I found an interesting perspective from Charlie Munger. When someone asked him about it a few months ago, he replied. “That’s simple. GM is in the Berkshire portfolio, because a young man who works for Warren likes it, and Warren lets them do what they please. When he was a young man, Warren didn’t like when old men told him what he couldn’t do. So he refrains from that with our young men. I haven’t the faintest idea why he likes it. Maybe it is cheap and there’ll be another god damn government bailout. The industry is too competitive. Everyone relies on the same suppliers, and cars last long time with little service, and leases of cars are all at cheap rents. This has the earmarks of a commoditized and difficult market and will shrink one of these days. If I was investing, I would want something way the hell better than others, and that’s hard to find.”

The Berkshire stake in GM has been accumulated by money manager Ted Weschler. He is a brilliant guy with a terrific track record. I would be interested to hear what he thinks about GM’s future. It is obviously totally different from my view. It sounds like it is also quite different from Charlie Munger’s.

Bottom Line

General Motors has struggled over the last several years. Today the company trades below its 2011 IPO price of $33. I think the operating environment will only get more competitive going forward. The industry is quickly evolving and I am not sure any of the automobile manufactures are investable. The amount of competition coming from technology companies is frightening. I have owned my car for about two years and by my calculation, I have spent around 4% of all my time driving in the last two years. I estimated an hour of each day. This 96% of idle time is a big opportunity for technology companies. We are seeing the competition ramp up and vehicle ownership is on the decline. These macro headwinds may have a large impact on GM’s business going forward.

Disclosure


No Position