AMERCO UHAL
September 26, 2016 - 3:42pm EST by
eigenvalue
2016 2017
Price: 335.00 EPS 22 25
Shares Out. (in M): 20 P/E 15.2 13.4
Market Cap (in M): 6,550 P/FCF 24 21
Net Debt (in M): 2,200 EBIT 800 880
TEV: 8,750 TEV/EBIT 11 10

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  • Self storage
 

Description

Summary: I recommend a purchase of Amerco (UHAL).  It owns 25MM sq feet of self-storage space and runs the U-Haul business.   It is a well-run, property backed business that is trading at a 9.5%+ steady state free cash flow yield to the equity (assuming company stops expansionary cap ex) plus has hidden assets on top of that. 
 
Description
 
Since Amerco has already been written up three times on VIC and most people are familiar with the self-storage and the U-Haul business, this section will be extremely brief.

The company has two lines of business: self-storage and moving.
 
Valuation/Financials
 
The company does not disclose segment profitability, so the numbers here are my estimates.

Self storage owns and operates 25MM sq feet of storage space that once all locations mature should be able to generate EBITDA of 220MM per annum, which I value at $4.4bn using a 5% cap rate. This translates into roughly $220 per share (there are 19.6MM s/o.)
(I am assuming average over the cycle occupancy = 90% and 70% EBITDA margins, which seems reasonable given operating performance of publicly traded competitors.  Publicly traded competitors are trading at cap rates closer to 4%.)
 
The profitability of self-storage is affected by newly opened facilities that have not yet stabilized.  Once these facilities stabilize, I expect revenues and EBITDA to increase by roughly $100MM per annum, or boost net income and free cash flow by $60MM. 
 
Moving business: I estimate that it generated roughly $21-22 in fully taxed EPS in fiscal 2016 (03/31/2016.)  The results in fiscal 2017 are likely to be lower for a number of reasons including company writing off immediately rather than capitalizing certain items due to a change in IRS regulations, switching to purchasing trucks rather than leasing them, lower gains on sale of equipment, company perhaps being over promotional and higher truck costs.  I expect the business to recover and post at least $21 in fully taxed EPS in fiscal 2018 (starts April 1st of 2017.)   I am not a great fan of this business, and value it at 16x EPS = $336 per share. 

Thus, the sum of the parts = $556 per share.  In addition, there are hidden assets.  For instance, the company recently monetized 170K sq feet of air rights in NYC (near the High line park) where these air rights would be worth in excess of $100MM or roughly $5 per share.  I believe that the company has plenty of facilities that can be be put to more profitable use in places like NY, and other major cities. 

So I believe that on the sum of the parts basis, the stock is worth in excess of $556 per share versus today's price of $335.
 
For those who would argue that since self-storage business is inside of a C-corp and the company is not planning to spin it off, I would say in that case, let's look at the free cash flow in a steady state, assuming no expansion.  Company claims that its maintenance cap ex is around $275MM per annum, while depreciation and amortization is around $415MM per annum.  Hence, net income + depreciation/amortization less maintenance cap ex was = $629MM in fiscal 2016 (ended 03/31/2016).  I expect this figure to decline in fiscal 2017 before recovering to at least fiscal 2016 levels in fiscal 2018 as newly opened self storage facilities ramp up and company rectifies the mistakes made in the moving business.  So, if we are using $629MM in free cash flow as a steady state figure, then it translates into $32 per share in fcf or a 9.5% fcf yield on a $335 stock price.
Thus any way you slice it, I believe that the stock is extremely cheap.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

None

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    Description

    Summary: I recommend a purchase of Amerco (UHAL).  It owns 25MM sq feet of self-storage space and runs the U-Haul business.   It is a well-run, property backed business that is trading at a 9.5%+ steady state free cash flow yield to the equity (assuming company stops expansionary cap ex) plus has hidden assets on top of that. 
     
    Description
     
    Since Amerco has already been written up three times on VIC and most people are familiar with the self-storage and the U-Haul business, this section will be extremely brief.

    The company has two lines of business: self-storage and moving.
     
    Valuation/Financials
     
    The company does not disclose segment profitability, so the numbers here are my estimates.

    Self storage owns and operates 25MM sq feet of storage space that once all locations mature should be able to generate EBITDA of 220MM per annum, which I value at $4.4bn using a 5% cap rate. This translates into roughly $220 per share (there are 19.6MM s/o.)
    (I am assuming average over the cycle occupancy = 90% and 70% EBITDA margins, which seems reasonable given operating performance of publicly traded competitors.  Publicly traded competitors are trading at cap rates closer to 4%.)
     
    The profitability of self-storage is affected by newly opened facilities that have not yet stabilized.  Once these facilities stabilize, I expect revenues and EBITDA to increase by roughly $100MM per annum, or boost net income and free cash flow by $60MM. 
     
    Moving business: I estimate that it generated roughly $21-22 in fully taxed EPS in fiscal 2016 (03/31/2016.)  The results in fiscal 2017 are likely to be lower for a number of reasons including company writing off immediately rather than capitalizing certain items due to a change in IRS regulations, switching to purchasing trucks rather than leasing them, lower gains on sale of equipment, company perhaps being over promotional and higher truck costs.  I expect the business to recover and post at least $21 in fully taxed EPS in fiscal 2018 (starts April 1st of 2017.)   I am not a great fan of this business, and value it at 16x EPS = $336 per share. 

    Thus, the sum of the parts = $556 per share.  In addition, there are hidden assets.  For instance, the company recently monetized 170K sq feet of air rights in NYC (near the High line park) where these air rights would be worth in excess of $100MM or roughly $5 per share.  I believe that the company has plenty of facilities that can be be put to more profitable use in places like NY, and other major cities. 

    So I believe that on the sum of the parts basis, the stock is worth in excess of $556 per share versus today's price of $335.
     
    For those who would argue that since self-storage business is inside of a C-corp and the company is not planning to spin it off, I would say in that case, let's look at the free cash flow in a steady state, assuming no expansion.  Company claims that its maintenance cap ex is around $275MM per annum, while depreciation and amortization is around $415MM per annum.  Hence, net income + depreciation/amortization less maintenance cap ex was = $629MM in fiscal 2016 (ended 03/31/2016).  I expect this figure to decline in fiscal 2017 before recovering to at least fiscal 2016 levels in fiscal 2018 as newly opened self storage facilities ramp up and company rectifies the mistakes made in the moving business.  So, if we are using $629MM in free cash flow as a steady state figure, then it translates into $32 per share in fcf or a 9.5% fcf yield on a $335 stock price.
    Thus any way you slice it, I believe that the stock is extremely cheap.

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    None

    Messages


    SubjectRe: Peak Margins?
    Entry09/28/2016 03:31 PM
    Membereigenvalue

    It is an excellent question, and certainly a topic that I should have discussed.  Unless I screwed up my math, I think their operating margins (EBIT) only went up to 26.5% for the company as a whole in fiscal 2016, but perhaps you meant EBITDA margin.  In any case, one major contributor has been gains on sale of equipment, which essentially went from zero in say 2010, to contributing 330 basis points to the operating margin for the moving and storage sector.  (27.24% operating margin for that sector on an EBIT basis in fiscal 2016, if you exclude gains on sale of equipment, becomes 23.94%.)  It is certainly a valid question of whether that number is sustainable, particularly given the performance in Q1 of fiscal 2017. 

     

    The discussion below will only relate to moving and storage segment and to EBIT (operating margin.)

    The moving and storage segment EBIT margin was 9.1% in FY 2005, moving up to 15% in FY 2006.  Company explained that by stating that maintenance and repair costs declined sharply as the company bought new trucks and replaced old ones.  The EBIT margin for that segment then declined to 11.5% in FY 2007, the company attributed that decline to massive increase in depreciation as it switched from leasing new trucks to buying them, and depreciation (the company uses accelerated depreciation) exceeding the rental costs.   In 2008, EBIT margins = 10.5% for this segment, due to increase in depreciation, as well as other expenses, while revenues declined slightly.  In 2009, EBIT margin = 5.7%, although if one adds back impairment charges, margins increase to 6.4%.  Revenues declined in FY 2009, while depreciation continued to rise.  In FY 2010, EBIT margin recovered to 10.2% even though revenues fell as maintenance & repair costs declined significantly and so did liability costs. Also, there was a slight gain on sale of equipment.  In FY 2011, EBIT margin rose to 19%.  This was due to revenues increasing by 10% due to strong demand and price hikes, while operating expenses went down, particularly liability costs and depreciation.  It is worth noting that excluding gains on sale of equipment, the margin for this segment would have been 18%.  In FY 2012, operating margin rose to 20%, or 19% excluding gains on sale.  Revenues rose by 6.5% while costs increased less.  In FY 2013, margin = 20.25%, or 19.2% excluding gains on sale.  2014 saw margins expand to 22.73% or 21.38% excluding gains on sale.  Revenues rose by 12.7% while costs increased by 9.2%.  Depreciation rose by 10% while lease costs continued to decline.  2015 operating margin = 21.8%, or 19.15% excluding gains on sale and 21.35% excluding gains on sale and litigation accrual.  FY 2016 saw operating margin increase to 27.24% or 23.94% excluding gains on sale.  Revenues rose by 6.2% while costs (excluding litigation from 2015 comparison) rose by just 3%.

    The above does not directly address your question.  I think that the business has changed since 2005, as the company has signficantly invested in the business and the fleet.  If you agree with that notion, then the margin average from 2010 through 2016 is around 19% if you exclude gains on sale of equipment.  That's probably a reasonable figure to use, although one could argue that given the very aggressive depreciation policies that the company pursues perhaps they should be added back.  I am using around 24% on a going forward basis for FY 2018 (starts 04/01/2017) and beyond.  One reason is that I am assuming roughly 1% point of gains on sale.  But perhaps I am wrong, and a more reasonable figure is 19%, if not lower.

    Sorry I could not be more helpful, and happy to hear constructive criticism.

     

     

     


    SubjectRe: Peak Margins?
    Entry09/29/2016 09:40 AM
    Membereigenvalue

    I would like to make one more point.  In my due diligence on the company, I consistently found that its prices for trucks in the U-Haul business were lower than the prices quoted by the competition, on average around 15-20% lower.   Therefore, I believe that the company would be able to raise prices to protect margins if they came under pressure.


    SubjectRe: Re: Re: Peak Margins?
    Entry09/29/2016 10:43 AM
    Membereigenvalue

    You are correct regarding Budget, but they are an extremely small player, and in my opinion it is a matter of time before they get out of the business.   I was comparing to Penske and called them.  


    SubjectRe: Re: Re: Re: Peak Margins?
    Entry09/30/2016 05:43 PM
    Membercastor13

    thanks, i called some Penske dealers myself and found similar results.  another question: how are you getting to $100mn incremental EBITDA on the newly-opened self-storage facilities?  leasing up the 2.6mn sf to 90% (so that's bringing 2.3mn sf at 0% currently and 286k sf at 73% up to 90% occupancy) @ $13.80 annualized rent / sf, gets you to around $35mn.

    here was what management said on the last call: 

    To pull the curtain back a little bit on the statistic, I think it’s important to highlight that this does represent an increase of 2.5 million occupied square feet compared to the same time last year. And to further clarify what’s happening, of the 4,200,000 square feet of new storage that we added during the last 12 months, a little more than 60% of that was new storage that came from our own development program. So this was added to the system at zero percent occupancy.

    The remaining portion was from the acquisition of existing storage facilities. These facilities have starting occupancies averaging approximately 73%. So this gives us a blended occupancy on the new square footage of about 20% over the last 12 months. If you exclude this new square footage, our reported occupancy would have been in excess of 90%.


    SubjectRe: Re: Re: Re: Re: Peak Margins?
    Entry09/30/2016 07:40 PM
    Membereigenvalue

    First of all, I should have included this calculation in the write-up.

    Here is the math.  At 90% occupancy and 26MM sq feet (on 09/30/2016), revenues = $14/sq * 26MM sq feet * 0.9 = $327.6MM in revenues, versus $248MM in fiscal 2016.  That's $80MM, true  there are some incremental expenses associated with 26MM sq feet versus 22MM sq feet that the company had on average during fiscal 2016.  Offsetting that however is the fact that company had $251MM of self-storage and self moving products and services sales.  Some of those revenues are clearly associated with self-storage.  I assumed (quite arbitrarily) that 50% of those revenues came from self-storage or $125MM.  Hence, I assumed that $1 of self-storage revenues also generated 50 cents self-storage products and services sales.  Hence, an additional $80MM of self-storage revenues would lead to an additional $40MM of revenues would be generated by that activity once the new self-storage space stabilizes.  Hence, $120MM of extra revenues, mostly very high margin.  I estimate that  4MM sq feet of extra storage would cost roughly $16MM of incremental expenses, and the contribution margin on the $40MM of self-storage product and service sales must be extremely high.  I assumed 90% and that's how I got to my $100MM figure.   The two big assumptions clearly are:  

    1) How much extra self-storage products and services revenues are generated for every addtional dollar of self-storage revenues?

    2) What are the incremental margins associated with each additional dollar of self-storage product and services revenues?

    To be clear, just self-storage maturation by itself, assuming zero additional increase in self-storage product and services sales would lead to $80MM higher revenues and $64MM of additional EBITDA versus fiscal 2016 levels. 


    SubjectRe: Re: Re: Re: Re: Re: Peak Margins?
    Entry09/30/2016 08:19 PM
    Membercastor13

    thanks eigen, that's helpful.  i don't know for sure, but my sense from reading through the filings/conference calls is that the great preponderance of the "storage and self-moving products" line item is related to the self-moving rentals biz (boxes and such) and that 50% to self-storage might be too aggressive esp. considering only 25% of self-storage customers use rental equipment.  sorry, this is sort of getting in the weeds, but where are you getting the 26mn sf sept 30 number?  using your method, here's where i'm shaking out (based on the numbers i have):

    self-storage sf as of 6/30/16: 24.9mn

    potential revenue @ 90% occupancy: 24.9mn x 0.9 x $14 = $313.7mn

    ltm (6/30/16) self-storage rev: $258.5

    difference: $55.3mn

    not sure i'm willing to give them anymore than $0.10 per self-storage dollar, but reasonable people can have different assumptions here. 

    so, maybe i go with $60mn x 90% incremental margin = $54mn.

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Peak Margins?
    Entry09/30/2016 09:41 PM
    Membereigenvalue

    They were at 24.9MM on 06/30/2016, and they are adding 1MM sq feet per quarter, hence 26MM on 09/30/2016.  I was comparing revenues (26*0.9*14) = $328MM to FY 2016, not ltm, that's another reason why my increase in revenues was higher than yours.  So that gives me a delta of $80MM of revenues, and $64MM of EBITDA.  (Additional 4MM sq feet generate $16MM of cash costs per annum.)

     

    In terms of self-storage and moving products and services, you may very well be right.  If you use your 10% assumption, then that generates $16MM of revenues and say another $12MM of EBITDA for a total of $76MM. 


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Peak Margins?
    Entry10/26/2016 02:57 PM
    Memberxds68

    I've noticed a lot more Pods in front of sold houses - is this a growing competitor? Does the Pod concept allow players to enter the business with lower cap ex? (being able to increase utilization, serve more people without needing to invest in a full truck fleet?) Does this make UHAL's moving business more difficult/competitive going forward?


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Peak Margins?
    Entry10/27/2016 08:53 AM
    Membereigenvalue

    It is a competitor, so clearly not a positive.  However it is a much more expensive competitor.  Pods will drive the truck for you.  So you have to pay for a driver, and hence appeals to a much more narrower demographic.  Their website is terrible.  While doing due diligence, I entered half a dozen potential moving requests, could never get a quote on the web, always have to call. 

    May be when you have fully autonomous trucks this can become a serious competitor, but till then, I don't see it.  Also, it is impractical for moves say from Brooklyn to Queens or within Manhattan or San Fracisco, since there is no room to put the Pod.  So any urban location would be problematic. 

    I am just curious, where do you see these Pods - geography and income level?

    Thank you

     

     

     

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Peak Margins?
    Entry10/27/2016 02:47 PM
    Memberxds68

    My old neighborhood outside of Boston - upper middle class suburb -

    I guess having looked more at UHAL and listened to their annual presentation, I have two worries, which wouldn't stop me from buying, but give me pause as to the right entry price - the first is residual value on used vehicles, where comment on presenation was recoveries would be lower, and second is frequency of long distance moves, since they have a bigger moat on those moves versus shorter urban moves where you can return truck to same place - do you have a sense of the trend there? I've seen some anecdotal articles that it has been trending down - 

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