AMERCO – U-Haul Is On The Move

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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.

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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.

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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

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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

 

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