|Shares Out. (in M):||20||P/E||9.2x||8.5x|
|Market Cap (in M):||2,295||P/FCF||6x||5.5x|
|Net Debt (in M):||911||EBIT||506||540|
We are recommending a long in Amerco (UHAL). UHAL has an easy-to-understand business with a key competitive advantage: in the do-it-yourself moving sector, its hub-and-spoke model dwarfs those of its competitors, which are few and shrinking. The valuation is cheap and a minute looking through CapIQ makes obvious the stock's high FCF yield and low P/E and EV/EBITDA multiples. The company is 50%+ owned by management and relatives, and there are numerous indications that management is focused on increasing shareholder value: (i) the company doesn't make stupid acquisitions, (ii) it uses FCF to retire debt, buy back preferreds, pay special dividends, etc., (iii) management doesn't court research analysts, provide guidance and and is very slow to respond to hedge fund requests for conference calls (that's actually a good thing). Finally, near-term operating momentum has been excellent and the business's long-term future also looks bright. UHAL will definitely be larger 3 years from now, 5 years from now and 20 years from now.
Our price target is $150+.
Amerco is a holding company that owns one of America’s most ubiquitous businesses - U-Haul, the nation’s dominant do-it-yourself (“DIY”) moving company; a category the Company’s founder, L.S. Shoen, created as a Navy veteran in 1945.
Investors shunned Amerco after it filed for bankruptcy in 2003, which was due to the company tripping accounting covenants, not business weakness. But the business has continued to perform perfectly well, and despite a 300%+ rally over the past couple years, Amerco shares still remain deeply discounted relative to their intrinsic value; for only 11x EPS and 5x EBITDA, long-term value investors can acquire the nation’s largest DIY moving company – a business we argue has a competitive position that is simply unassailable, while also acquiring a highly synergistic self-storage real estate portfolio.
U-Haul’s first mover-advantage has sustained its leading position in the DIY moving space for over 60 years. Its fleet is 3x the size of its nearest competitor, its network has 8x as many locations, and its lead in both metrics is growing rapidly. Over the past six decades, numerous competitors have tried, and failed, to dent U-Haul’s market position. Following the recent recession, the larger of the last two remaining national competitors, Budget Truck Rental, has begun to retreat from the DIY rental space while U-Haul has expanded aggressively to fill the void, further widening its competitive advantage and greatly improving its margins and raw earnings power.
Additionally, Amerco has an often overlooked but valuable hidden asset in its real estate self-storage portfolio, which generates ~25% of its free cash flow. Based on current market valuations for self-storage REITs (15x-20x EBITDA), Amerco’s 38 million square feet of self-storage real estate alone could be worth $110.00 a share, giving investors the U-Haul business and insurance businesses for free. Of course, this is mostly theoretical, but we'll mention it anyways.
Finally, Amerco’s insurance subsidiaries, which were once money-losing operations, are now well-capitalized and growing, and most importantly for investors, they're not a detractor of value.
Though we do not see a hard catalyst to revaluation, we are content to allow management to continue executing share buybacks which, at these levels, are estimated to be immensely value accretive for long-term investors. Earlier this week, the company announced a special dividend equal to 4% of the share price. As Amerco distributes cash flow to shareholders via share buybacks and special dividends (with the potential to launch a regular dividend soon), we believe the valuation disconnect will eventually be closed as investors acknowledge the raw earnings power of Amerco’s component businesses.
This investment opportunity exists partly because Amerco has no research coverage, has limited float (the founding Shoen family still owns 55% of the company) and its amalgam of do-it-yourself truck rental, storage real estate and insurance businesses with no dividend leaves it an orphaned stock with no direct comparable. Furthermore, Amerco has a choppy history, including a $400m+ shareholder lawsuit in 1994 and a covenant-triggered bankruptcy in 2003 (there was no equity impairment, explained further in this report). Despite these challenges, CEO Edward “Joe” Shoen, son of late founder L.S. Shoen, has quietly guided the company to record earnings while greatly improving Amerco’s competitive position in all of its business lines.
So long as Americans and Canadians are able to move freely, they will rent trucks, trailers and storage rooms from U-Haul because it is both the lowest cost and most convenient moving equipment rental company.
Amerco owns three primary business lines:
The core U-Haul business has greatly improved its profits by aggressively expanding its rental fleet as competitors have retrenched from the retail DIY market. The storage business has been a steadily improving profit generator that showed resiliency during the recession. The insurance businesses have a current book value of $340 million and are ok businesses. Several years ago, Repwest suffered losses in non-core insurance lines. Today, Repwest only insures U-Haul rentals. The Oxford life insurance business ($220m book value) has improved its performance and could be readily sold to a strategic buyer that could achieve significant synergies.
Historical Revenue and EBIT are available here: http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-Revenue-and-EBIT.gif
Rental Business Model
Management estimates that the moving industry is an approximately $10B market. Of this market, they estimate that DIY-moving represents approximately 30%, of which U-Haul is estimated to control over half of the market. Because moving equipment is expensive yet used sparingly, it is perfectly suited for a rental model. Moving equipment is a commoditized asset – thus, rental companies compete largely on price, availability, and convenience of locations. Customer awareness is a very important factor however; and U-Haul is by far, the most widely known DIY moving company with its trailers synonymous with self-moving.
The do-it-yourself moving business can be segmented into two types of moves: intra-city moves, where equipment is rented and returned at the same location, and “one-way” moves, where equipment is rented from one location and dropped off at another.
Intra-city moving is a highly commoditized service where new competition is relatively limitless (anyone can rent out their truck, or van, for the day). Nonetheless, given the seasonal nature of self-moving (most moves take place in summer and on long weekends), large rental organizations tend to offer more reliable equipment availability. Within the intra-city moving market, we believe U-Haul has a very strong market position, but it's within the inter-city moving market where U-Haul has a particular edge. Though equipment is still a commoditized service, in one-way rentals, the importance of having the largest, and broadest network of locations which accept and rent out equipment is essential. Furthermore, factors such as superior equipment reliability (especially for long-moves), customer service and roadside assistance also take on more importance.
It is in this market that U-Haul stands alone as the dominant rental company, with over ~16,000 (and growing) “nodes” in its network (1,100 company-owned), versus only ~2,000 (and falling) for Budget. Thus, when moving between cities, it is very difficult for Budget or Penske to compete with U-Haul in terms of offering convenience or an affordable price. U-Haul locations benefit from a virtuous cycle: U-Haul is the best-known DIY rental company, it acquires the greatest number of customers, allowing it to purchase the largest number and variety of trucks, and to rent out those trucks most often. U-Haul’s higher utilization rates lower their equipment cost, which allows them to lower their prices even further, further enticing even more customers to come to their service
Over the years, several commercial trucking companies have attempted to utilize their commercial trucking platform to also capture share in the retail DIY moving market. Major commercial trucking competitors such as Ryder Truck Rental (division of logistics provider Ryder System), Hertz Truck Rental (division of car rental company Hertz) and Penkse Truck Rental have all been generally unsuccessful at making any major headway in the retail DIY rental market outside of the intra-city market because they did not have enough locations in their networks to compete in the “one way” market. Furthermore, their commercial trucking fleets were generally incompatible with the smaller trucks desired by retail DIY consumers. Today, most of U-Haul’s competitors compete largely in the intra-city market, leaving U-Haul with a very dominant position on most “one way” moves.
U-Haul is a physical distribution business that benefits from a very powerful network effect, similar to Sysco, UPS, etc. Like the aforementioned examples, each additional asset and node in its network not only allows U-Haul to compound its earnings, but also increases the value of U-Haul’s service by making it both the most convenient rental provider (via # of locations) and the lowest cost provider (via utilization rates).
U-Haul has two national competitors in the retail DIY moving equipment rental space, neither of which see the DIY market as a primary business line. U-Haul’s largest competitor is Budget Truck Rental (which acquired Ryder systems), a subsidiary of Avis Car Rental, and the second smaller competitor is Penske Truck Rental, a subsidiary of Penske Truck Leasing (which is itself a JV between Penske and GE Capital).
Following the recent recession, Budget significantly retrenched from the consumer DIY truck rental business, allowing U-Haul to expand its fleet, take market share, and improve its profitability. U-Haul’s widening gap relative to competitors on almost every operating metric is making it more and more difficult for others to compete on either price or service; it is our view that U-Haul’s competitive moat is now too daunting for competitors.
Historical Truck Fleet: http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-Truck-Fleet.gif
U-Haul is Widening its Competitive Moat as Competitors Retrench: http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-UHAL-vs-Budget-Comparison.gif
Our shopping comparison shows that U-Haul is generally a low-cost provider or only provider for most “one way” moves and prices in line with Budget for intra-city moves (Penske does not provide price quotes on its website, but tends to offer more expensive premium commercial trucks). Given the sizable gap between U-Haul’s operating margins and those of its competitors, we think pricing discipline in the industry will be very well maintained since any price war with U-Haul would be akin to financial suicide.
Amerco has a sizable storage real estate portfolio and property management business (Amerco manages storage properties for property owners). The real estate business now generates a steady $130 million of EBIT per year, almost as much as the U-Haul business line.
Amerco is Expanding Heavily into Storage Real Estate: http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-Real-Estate-Metrics.gif
Self-storage real estate is some of the most highly valued real estate in the market because the facilities require little maintenance expenditure, do not “age” like residential properties, and like parking lots, storage parks can eventually be converted to other real estate purposes (ex. commercial, residential, etc.) when/if alternate uses become more valuable. Though management has given no indication that it intends to sell off Amerco’s real estate portfolio (38 million square feet) or convert it to a REIT to shelter taxes, it's worth noting that at least theoretically the current self-storage footprint could be converted into a REIT or monetized in a sale to numerous public REITs. These self-storage assets would be viewed favorably by REIT buyers and REIT investors given that they are affiliated with America’s largest DIY moving equipment business.
Here is (a somewhat dated) comparables analysis of self-storage REITS: http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-Storage-REIT-Comparables.gif
A major factor in the Amerco investment thesis is the quality and integrity of the Shoen family, which has run Amerco and U-Haul for over 60 years.
Amerco has been under the stewardship of Joe Shoen since he wrestled control of the company from his own father and brother in 1986. He is passionate about the company, and it is evident that management has a clear vision as to the long-term strategic opportunities, and threats, to their business, and will fight any potential risks head-on.
Unlike its competitors, DIY moving is the life-blood of Amerco (for example, the retail truck rentals business is only 6% of Avis), and Joe Shoen lives and breathes his family’s U-Haul business. Despite being a $3B+ business, Joe Shoen pays himself only $700k-$900k per year, with most executives receiving modest pay packages compared to similarly sized companies. In order to save costs, Amerco has an electronic AGM (possibly also to avoid fist fights – see company history later in this report) and it runs a very modest corporate SG&A level (only $8-10 million vs. $2.5B in revenue and $600m+ of EBITDA).
With respect to the long-term strategic plan for U-Haul, Joe Shoen wants to provide enough additional services such that the choice of U-Haul vs. competitors is as much about convenience and a full service offering as it is about price.
Since most DIY movers also require temporary storage space, Amerco has spent years investing heavily in self-storage real estate. U-Haul decided to confront the remote potential threat of “pod” moving by offering a new service nationwide whereby DIY movers simply pack their belongings in “U-Boxs”, and outsourcing the entire delivery process to U-Haul.
Over the years, U-Haul has expanded its in-store offering to include a wide variety of moving products to make the DIY moving process easier, including boxes, lifts, wraps, gloves. U-Haul is also the nation’s largest network of propane refilling stations, as well as the largest installer and seller of trailer hitches.
U-Haul is even moving into the full-service moving market by now offering moving referrals, allowing customers to rent a U-Haul truck and hire movers to handle all the work. This allows customers to use a moving company that is referred by a well known company, while controlling the actual moving equipment. This prevents tactics often used by predatory moving companies which will move goods into a truck and then charge families extra fees not in the original contract, holding the person’s personal assets in the truck as collateral (one can quickly find hundreds of complaints against moving companies with a quick google search).
The insurance business, Ponderosa, is now expected to be a small but consistent profit driver for Amerco. Poor underwriting in the past left Amerco with sizable losses in its insurance division; going forward, management has committed the Repwest subsidiary ($120m book value) to simply insuring U-Haul vehicle rentals, while the Oxford insurance business (220m book value) offers life insurance. The Oxford business could be readily sold to an accretive buyer with significant synergies should management choose to divest the business line. For now, management has stated an intention to expend additional capital to grow Oxford.
Amerco’s capital expenditures are almost entirely related to the U-Haul equipment rental business. U-Haul consumes considerable capital per year, and also has sizable dispositions, as the truck rental fleet is maintained. Trucks are depreciated on a 15-year accelerated basis, though Amerco tends to often sell many of them before the full 15 years.
One of Joe Shoen’s main contentions with his father and elder brother was their decision to allow the U-Haul truck fleet to age in order to “milk” the business for cash flow. Since taking over, Joe has consistently spent large sums of capital to maintain U-Haul’s fleet. However, it should be noted that over the past couple of years, U-Haul has expanded its fleet significantly from 96,000 at the depths of the recession to 106,000 this year. We estimate that “maintenance” capex for U-Haul is approximately 15% of its annual fleet, or 15,000 trucks, which should be a capex spend of ~$350 million to $400 million, offset by dispositions of approximately $100 to $150 million, resulting in a net maintenance capex figure of $230 million (which is very close to the run-rate D&A level). Capex levels will swing depending on whether management chooses to buy trucks or lease them.
Much of the capex is growth capex as fleet and store count has expanded:
EBIT vs. EBITDA vs. EBITDAR vs. Adjusted EBITDA
Note that since management can choose to finance trucks by leasing them, or buying them outright, figures such as EBITDA, or EBITDAR tend to be less meaningful for U-Haul. Avis presents an adjusted figure called “Adjusted EBITDA”, but which is similar to EBIT except it accounts for any interest expense related to vehicles.
Long Term Earnings Power and Margins
Amerco is currently earning record margins on the back of greatly improved truck utilization in the U-Haul segment. Historically, industry profitability ebbs and flows as competitors add / remove capacity depending on industry pricing. However, it is very telling that during a period of Amerco’s peak profitability (and respectable EBIT margins for Budget and Penske), Budget, the primary competitor, is greatly reducing capacity and retrenching from the DIY market.
Historical Margins: http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-Historical-Margins.gif
Given the sizable expansion in U-Haul’s rental fleet over the last two years (96,000 trucks and 75,000 trailers to 106,000 trucks and 83,000 trailers), combined with the significant retrenchment by Budget Truck Rental, U-Haul’s core earnings power has been significantly increased. Note that past performance has been distorted by accelerated depreciation on new trucks as well as accounting distortions caused by consolidating SAC Holdings (in which Amerco has no economic interest). Nonetheless, we think Amerco’s EBIT contribution will be more steady going forward, as the company continues to add trucks while Budget / Penkse pull back, and pre-tax earnings potential is well in excess of $250 million, or a 12.5% EBIT margin based on current run-rate revenue in excess of $2.0B.
Importance of Business History to Understand Context of Investment Thesis
Amerco’s has one of the most interesting corporate stories in American history; one that includes family battles (figuratively and literally), lawsuits, accounting scandals, bankruptcy, and even murder and suicide. It is important to understand the highlights of this history to realize why the bankruptcy in 2003 is not indicative of any issues with the business, and why Joe Shoen, the current CEO and Chairman, is obsessively passionate about the health of the company.
Like millions of other war veterans, L.S. Shoen was unable to procure suitable moving equipment for a “one way” migration after returning from WWII. Recognizing the benefit of spreading equipment cost with a rental model, L.S. founded U-Haul with $5,000 in order to fund the purchase of its now-ubiquitous orange U-Haul trailers. Over the next 25 years, L.S. created a network of U-Haul franchisees (often individual gas / service stations) that would accept and rent U-Haul equipment, single-handedly creating the nation’s first one-way DIY moving equipment rental company. In 1969, L.S. established Amerco, the parent-company of U-Haul. At the same time, L.S. distributed his shares in Amerco to his 13 children (L.S. had 5 wives), slowly transitioning the business to his sons. Two of his sons, Sam (the eldest and former CEO) and younger Joe (the current CEO and Chairman), both Harvard MBAs, were clearly positioning to run the firm.
Downfall of Amerco and Sam Shoen
The 1973 oil embargo reduced residential mobility and forced the closure of many of the independent gas/service stations U-Haul relied upon for its network. In order to maintain its national network, U-Haul was forced to invest in its own company-owned U-Haul Centers. L.S. and eldest son Sam decided to use the company-owned U-Haul Centers as an opportunity to also rent non-core assets such as recreational equipment, skis, and movies, but as a consequence, did not invest in maintaining the core U-Haul truck fleet. Amerco also expanded into non-core business lines such as insurance. Two of L.S. Shoen’s sons, Joe Shoen and Mark Shoen, vehemently disagreed with their father and eldest brother’s strategic decisions. In 1979, L.S. made eldest son Sam the CEO of Amerco; Joe and Mark subsequently resigned, accusing their elder brother of incompetence.
The non-core rental businesses turned out to be a financial disaster. Meanwhile, the aging truck fleet allowed Ryder Truck Rental to enter the market with newer trucks that offered air conditioning and lower maintenance expenses; Ryder successfully captured a sizable share of the market.
Board Coup and Family Fist Fight
With Amerco’s profits in precipitous decline, Joe and Mark successfully convinced selected siblings to support a shareholder coup, and at the 1986 AGM, Joe kicked his own father out of the Chairman role and eliminated his father’s pension, and one year later, pushed his brother Sam out of the CEO role.
Continued squabbling amongst L.S. Shoen and his children culminated in the 1989 Board meeting where, in order to win a key shareholder vote, Joe Shoen issued 8,099 shares of Amerco stock to friendly executives. This set off a now-infamous fist fight at a shareholder meeting between brothers Mark and Mike, and led to a landmark lawsuit between L.S. Shoen and Sam vs. The U-Haul Board of Directors and Joe Shoen (then Chairman and CEO).
Having taken control of the business, Joe divested Amerco’s non-core business lines, and invested heavily in upgrading the fleet. Over the next several years, Amerco’s earnings greatly improved, and the competitive battle with Ryder Truck Rental ended with U-Haul emerging the clear victor when Ryder was acquired by Budget Truck Rental (a division of Avis).
Murder, lawsuits and suicide
The U-Haul saga reached a tragic turn in 1990 when the wife of Sam Shoen, Eva, was found murdered in their home. L.S. openly accused his own sons (Joe or Mark) for being responsible for the murder of their sister-in-law Eva. The murder was solved years later with no link to either Joe or Mark. Nonetheless, libel lawsuits and countersuits were filed, and family relations became irreconcilable.
In 1994, Amerco suffered a disastrous setback when L.S. Shoen won his lawsuit against the company for the infamous 1989 share issuances. Amerco was forced to pay a $400+ million settlement; however in exchange, L.S. Shoen and others involved in the lawsuit sold their shares in Amerco, leaving Joe, and brother Mark, firmly in control.
By 1999, L.S., having overseen over two decades of infighting between his children, drove his own car through a telephone pole, committing suicide at the age of 83.
The SAC saga, accounting-triggered bankruptcy, and reemergence
For several years, Amerco was financing the building of real estate storage assets through a special purpose vehicle called SAC Holdings which was owned by Mark Shoen, a director of the company. Though Amerco had no ownership or equity stake in SAC, and only earned a fee for managing the storage facilities for SAC Holdings, new accounting rules forced Amerco to fully consolidate SAC Holdings’ financial statements, including its sizable debt load, on to its public statements. Though the debt was non-recourse to Amerco, this triggered certain accounting-based covenants on the company’s debt, and Amerco was forced to file for bankruptcy in 2003.
Interestingly, Amerco emerged from bankruptcy with its capital structure in tact, and creditors repaid in full as new creditors offered financing. The core businesses remained highly profitable throughout the saga.
For several years following the 2003 reemergence, Amerco was forced to continue to consolidated SAC Holdings onto their books, despite having no economic interest in SAC (other than loans made to the company). Since SAC was highly levered, had a negative book value, and was not profitable, it masked the phenomenal profitability of the core U-Haul moving and storage businesses. Furthermore, the loans to SAC were yielding only 6%-10%, far lower than the 10%-20% return on equity that Amerco was consistently earning in its U-Haul business.
Over the years, the SAC loans were slowly repaid (today, there are only $170 million left outstanding), and SAC ceased to be consolidated in U-Haul’s operations as of 2007.
|Subject||RE: And you want to invest alongside these people?|
|Entry||11/09/2012 10:01 AM|
Yes, I do.
|Subject||RE: And you want to invest alongside these people?|
|Entry||11/09/2012 10:43 AM|
I'm sorry, that was an annoying response.
Yes, I like Amerco management based on what I've seen. First, I'd look at how they've allocated free cash flow over the past few years. In 2012, they generated approximately $250mm of Cash Flow from Ops less Capex. They used $144m of that to retire preferred stock. In 2010 and 2011, they generated collectively approximately $550m of CFO less Capex. They retired $200m of debt with that. They also paid a special dividend in 2012 and announced another special dividend in the most recent quarter equivalent to 4% of the share price.
Operationally, the company has been doing well, increasing revenue, profit and earnings, and an examination of the competitive landscape demonstrates that competitors are re-trenching.
I don't think that the family fights and off-balance sheet accounting issues that triggered the bankruptcy are relevant in a negative way now. We included it in the writeup just because the context is helpful to understand that this is a family-led business that's committed to running a DIY moving business for a long time going forward.
|Subject||RE: RE: RE: And you want to invest|
|Entry||11/09/2012 11:21 AM|
I think you're getting too caught up in details that aren't much relevant to whether we as shareholders make money off of this stock over the long-term. Let's say that you're right and that SAC got absurdly good terms, which was a direct transfer of shareholder wealth. Let's say that management benefited from a $10 million transfer of shareholder wealth in 2001 that was done via a dubious related party transaction.
In the whole scheme of things, that's not directly related to whether UHAL is well-run operationally, grows over the long-term at the expense of its competitors, continues to innovate in its market niche to fight off competitive forces (ie. U-Boxes), avoids dumb acquisitions / misguided entries into new businesses, and returns cash to shareholders in a value-enhancing manner.
A transfer of wealth via a related party transaction is not terribly different from management just overpaying itself. Let's say the CEO's salary was $5 million annually. That's just not terribly relevant when you're dealing with a $2bn market cap company. From my perspective, as long as they're running their business properly (and UHAL frankly is one of those superior businesses that sort of runs itself) and they're returning cash to shareholders and paying down debt / preferreds, I'm perfectly fine with them overpaying themselves, in whatever way they want to do it.
As a corollary, I run a fund and I aspire to pay myself and my employees handsomely. One of the ways I do that is by expensing costs to the fund instead of the management company. Let's hypothetically say that we have an unusually high expense ratio. That doesn't mean that no one should invest with us. At the end of the day, what's important to clients is the net returns. In the same way, what's important to UHAL is the value created for shareholders, and tiny transfers of shareholder wealth just are not material.
Of course, direct transfers of wealth via related parties could be a red flag of something more sinister. But UHAL's capital allocation over the past 5 years has been superb. That's enough to outweigh the SAC Holdings mistakes of 10 years ago.
|Entry||11/09/2012 12:05 PM|
SAC is a holding company owned by Mark Shoen that invests in self-storage real estate. Years ago, Amerco had provided loan financing to SAC, and was selling real estate to SAC, while earning property management fees for managing the real estate. Amerco has no equity interest in SAC whatsoever; however, SAC did have a large loan from Amerco.
Following the Enron fraud, new accounting rules forced Amerco to consolidate the operations of SAC, an off-balance-sheet VIE, on to its balance sheet. This tripped certain debt covenants, which pushed the company into bankruptcy. Note that the core business was perfectly fine - the accounting covenant simply created a liquidity issue since the debt came due immediately. Amerco refinanced the debt in Chapter 11, and the company emerged with creditors paid in full, and equity fully in tact.
For those analyzing Amerco's financial results going back many years, consolidating SAC created some complexities in the accounting between 2001 (restated) to 2007 (fiscal year ending March 31). Recall that Amerco has no equity interest in the operations of SAC, but due to accounting rules, SAC's financial results were consolidated onto Amerco's income statement. Our estimate of the financial contribution of SAC is as follows:
The last 5 years of financials are "clear" of any SAC noise, other than property management fees Amerco receives for managing the SAC properties. SAC has essentially repaid its debt to Amerco (there is less than $100 million left).
With respect to the latest Shoen lawsuit, that lawsuit was dismissed with prejiduce a few months ago:
|Entry||11/11/2012 06:51 PM|
Does this trade on P/E, P/B or EV/EBIT typically? What consitututes a historically cheap trading multiple? With no catalyst, and high capital intensity, I just want to be sure this is actually an inexpensive as it seems. Thanks for the posting.
|Subject||RE: Historical Multiples|
|Entry||11/12/2012 05:28 AM|
I think P/E and EV/EBIT are both fine (I tend to just use EV/EBITDA, but let's do EV/EBIT since that was your suggestion). D&A is approximately $230 million, whereas annual capex has been ~$300m for the past few years (for capex calculations, you should use truck purchases less truck dispositions). So EBITDA less $300m is probably a better calculation than EBIT because D&A may understate the go-forward actual capex spend (run-rate capex expectations is something we'll be asking management about on our next call).
Here are historical trailing multiples, from CapIQ.
I'll caution that those numbers have simply been pulled from CapIQ, and I haven't checked them against the SEC filings. The insurance subsidiary also may distort numbers, and I haven't stripped out any unusual items from the insurance business (2011 saw a ~30m operating loss at the property & casualty segment, but 2006 through 2010 didn't show any insurance profits that were unusual).
Personally, while historical multiples are a helpful datapoint, my preferred approach to valuation is to look at how much free cash flow the company has been producing, defined by cash flow from ops less capex, in each of the past four years, and comparing that to the current enterprise value. Then I compare that multiple to the sort of EV/FCF multiples that I see for other companies that I predictably believe will grow year after year, and will be materially larger 5-10 years from now, and will certainly be around in a larger form 20 years for now.
LTM FCF (CFO less Capex): $453m
2011 FCF (CFO less Capex): $244m
2010 FCF (CFO less Capex): $273m
2009 FCF (CFO less Capex): $$285m
Current TEV: ~$3bn
So the company is generating $300m of cash off of $3bn of EV. If you want an unlevered FCF figure, it's more like $350m (annual cash paid for interest has been $80m to $90m over the past three years). Basically, this company generates a healthy amount of cash relative to the market cap / enterprise value of the company, and management is using that cash for preferred repurchases, special dividends, stock repurchases, etc.
We own shares in a number of companies with diversified revenue streams, fragmented customer bases, nice near-term operating momentum and a sustainable long-term business model, including YUM, CL, WSM, HSIC. While all of these companies are growing faster than UHAL and will probably have healthier long-term growth, they trade at 18x to 22x earnings. We're paying half that multiple for UHAL. Given UHAL's lower growth profile, a more appropriate multiple for UHAL is 15x. At 15x, UHAL shares are worth $160.
|Subject||RE: Normalized Margins and ROIC|
|Entry||11/12/2012 03:28 PM|
It's difficult to separate out cyclical versus secular factors in margins, and although we can examine the competitive landscape and UHAL's position, I'm not sure I can give you any more comfort than what I've already written. But I'll add on some additional thoughts on margins.
Amerco's EBIT margins have partly risen due to the use of IT systems to optimize U-Haul's truck fleet. Over the past 10 years, U-Haul's revenue has grown 34% while its truck fleet has expanded a modest 6%. Amerco's margins have also benefitted from the growth of the real estate business (85%+ EBIT margin).
Naturally, during recessions, U-Haul's margins decline because it takes some time to shrink its truck fleet via retirement (as happened in 2001-2003, 2007-2009). I am watching competitor commentary and believe that competitors are retrenching. Note the latest quarterly commentary from Avis Budget:
"Revenue in our Truck Rental segment declined 3% as a 2-point increase in pricing was offset by a 5-point decline in rental volume. Adjusted EBITDA declined $8 million primarily due to lower revenue and higher maintenance costs incurred to increase the average number of trucks available for rent... We're facing a tough competitive environment in Truck Rental... In response, we will be repositioning our Truck Rental business to rightsize it for the demand we anticipate."
As for ROIC, Amerco's consolidated ROIC is ~12% but the U-Haul business earns over 25% (real estate is naturally lower-risk and thus lower ROIC). The long-term ROIC for U-Haul depends on balance sheet assumptions (fleet size will shrink during recessions, grow during growth) but I think 15%-20% ROIC is reasonable long-term.
|Subject||RE: RE: RE: Normalized Margins and ROIC|
|Entry||11/16/2012 09:57 AM|
The "related party assets" are largely loans to SAC, a real estate investment vehicle owned by Mark Shoen. It should be noted however that as of the latest 10-Q, SAC has repaid a large chunk of its outstanding loans to Amerco; Amerco will continue to earn attractive fees for managing SAC's properties.
We attributed the interest income on the loans to the insurance business, and property management income to real estate. From what we can tell, the U-Haul business segment appears to be earning a 20%+ ROIC, which is higher than in the past, not lower (for reasons we discussed in the Q&A - customer retrenchment, better fleet management, etc.) That said, yes, coming out of the recession we expect U-Haul to perform quite well.
|Subject||RE: U haul sources of demand|
|Entry||11/20/2012 04:34 PM|
The primary revenue driver for the U-Haul segment is understandably housing mobility. However, the segment's growth is also influenced by a variety of factors; competitive dynamics (how many trucks they can deploy, at what profit level), how much ancillary revenue they sell (this component has been growing for years, and is very high margin), and how far people move (ex. an intra-city move might generate $50, an intercity might generate $500+).
The U-Haul segment is gaining share; revenue is near ~$2B today vs. ~$1.5B in 2003. Profits are driven by significantly improved asset utilization through in-house IT-based revenue maximization systems.
|Subject||RE: Real Estate EBIT|
|Entry||11/21/2012 08:24 PM|
Accounting complexities hide fact that Amerco generates a lot of income from real estate:
On the surface, the latest 10-k seems to indicate Amerco made $60m of EBIT from Real Estate. However, Amerco allocates "self-storage" and "property management" revenue to the U-Haul segment, despite the fact that both functions are clearly from real estate operations (reasons mostly due to financing and operations). We made adjustments to appropriately determine Amerco's storage real estate profits.
For example, in FYE Mar 2012 (the latest 10-k), the U-Haul segment reports $133m of self-storage revenue and $23m of property management revenue. If these are appropriately allocated to Real Estate, less $86 million of intercompany, you get to about $130 million of EBIT for real estate.
Some of the ancillary revenue (products & services sales) is also related to real estate. However, some of U-Haul's SG&A is used to administer o real estate as well. We think $100-$130 million is a fair approximation of real estate cash flow (~25% of Amerco's total).
Additional "Hidden" real estate value - Amerco has been buying real estate since the 1960's!:
We discovered through a call with management that Amerco owns ~1,100 of its 1,500 corporate locations, many of which were acquired decades ago and are on the books at historical cost. Such sites could include its Chelsea location in Manhattan, which is earning no rental revenue, but clearly have enormous land value. Amerco also owns prime real estate in Chicago, San Fran, Boston, etc. Though investors are not likely to see a REIT or monetization of the real estate, the enormous intrinsic real estate value does provide us considerable comfort with respect to limiting our intrinsic downside.
With respect to the question regarding sensitivity - the other company you mentioned may earn greater income based on the value of real estate, vs population mobility. U-Haul's revenue tends to hold up quite well in any economic environment - however, its margins do fluctuate depending on utilization and fleet age.
|Subject||RE: RE: RE: Real Estate EBIT|
|Entry||11/28/2012 08:58 AM|
based othis'd national moving data, the performance of the rental business through the cycle does in fact make sense.
|Entry||12/04/2012 09:10 PM|
Active vs. prospective
Enterprise is not yet a sizable competitor - it is more of a prospective threat given its existing real estate and significant finance resources. Unlike when Ryder competed with U-Haul in the 1980's-1990's (at one point matched U-Haul's fleet size), U-Haul's incumbent fleet size today is many multiples of its nearest competitor.
The biggest advantage Enterprise has is a ready-built IT and tracking system, as well as convenient real estate. However, as one person noted - there are nearly as many U-Haul-accepting rental locations (16,000+) as there are Starbucks! We think it will be very difficult for Enterprise to make major headway into the truck rental business from scratch - unless they decide to be an undisciplined competitor.
Enterprise is completely absent from key markets
As stated earlier - in one-way / intercity moves, U-Haul has all but captured the market. Its network and fleet size is simply too large to compete with. Within intracity moves, we note that Enterprise does not have convenient truck rental locations (in some cases are completely absent) in Manhattan, Philadelphia, Boston, San Francisco, nor Chicago. This compared to U-Haul, which has been acquiring land since the 1970's, and has locations in major city cores (a quick tour of their Chelsea Manhattan hub will show why competing in U-Haul's entrenched markets is a losing proposition).
We think it is more likely Enterprise will focus efforts on intra-city moves, which is the lowest-margin business, and do so primarily in key suburban markets where they have existing car rental real estate.
|Subject||FY Q3 Earnings Update|
|Entry||02/14/2013 12:26 PM|
AMERCO reported FY Q3 results and management continues to execute in all lines of its business. EPS growth was an impressive 15% for the quarter on the back of 5% revenue growth in the U-Haul segment and 15% revenue growth in the self-storage segment. EBIT margins continue to be strong as U-Haul captures market share and competitors retrench.
|Subject||UHAL reporting today|
|Entry||06/05/2013 11:22 AM|
UHAL is reporting after close today and I wrote an article reviewing some of the recent competitive dynamics in a Seeking Alpha article:
I'll write a review of the quarter after they report.
|Entry||06/06/2013 07:31 AM|
AMERCO reported FY 2013 Q4 numbers yesterday after close (yhoo.it/1b5E4pN) and the numbers were excellent.
Q4 EPS was $1.94, which trounced analyst estimates of $1.40 (I don't have my bloomberg in front of me, I'm just assuming that this link http://bit.ly/18XwVeI is accurate). Last year's Q4 EPS was $1.29. EPS growth was driven by 7% revenue growth in the U-Haul segment and 18% revenue growth in the self-storage segment.
For the full-year, EPS reached $13.56 per share, from $11.70 the prior year. Trucks deployed were up 5.7% and square footage of real estate owned/managed up 5.8%. The outperformance in the storage segment was driven by continued improvement in occupancy, which reached 79% from 77% last year.
Profits in AMERCO’s small insurance business posted steady growth over prior year levels.
Looking forward, AMERCO continues to look promising. As discussed here in http://seekingalpha.com/a/vp37, its largest competitor, Budget Truck Rental, has announced that it will spend the next few quarters further retrenching and restructuring its truck rental business. That should be favorable to UHAL and hopefully they will fill the void in markets where Budget is reducing its footprint.
Finally, UHAL should benefit from the housing recovery. As more people move, that should benefit both UHAL's truck rental and self storage businesses. At $175/share, AMERCO trades at 13x EPS, 6.1x EV/EBITDA, and 9.3x TEV/EBIT. That seems significantly undervalued for such a dominant franchise.
|Subject||UHAL 6/30/13 earnings|
|Entry||08/12/2013 01:37 PM|
AMERCO reported FY 2014 Q1 numbers after close on Thursday, August 8th, and the company's results were positive in all respects. EPS came in at $5.78 versus $4.13 in the year ago period, an impressive 40% increase in EPS.
The quarter's earnings were driven by broad-based execution in all of AMERCO's business lines. The truck rental business showed a 12% growth in revenue, while the storage segment put up an impressive 22% increase. Leveraging fixed costs resulted in the aforementioned 40% increase in EPS. EBIT grew by 35%.
Capex significantly exceeded depreciation, driven by increases in both truck count and real estate holdings. AMERCO does not disclose its truck count on a quarterly basis, but the increased capex indicated that AMERCO continues to expand its truck fleet, reinvesting for future growth.
AMERCO remains significantly undervalued. At today's value of approximately $180.00 per share, AMERCO trades at only 12x LTM EPS, 5.8x LTM EV / EBITDA and 8.6x LTM EV / EBIT, quite cheap when one considers that AMERCO dominates its market niche, has a seasoned management team with a strong operational track record, allocates capital well, earns a significant portion of its cash flow from real estate, and its truck rental business has an insurmountable and growing competitive advantage in its industry.
UHAL remains my largest position.
|Subject||RE: RE: RE: RE: question|
|Entry||08/21/2013 09:23 AM|
There are numerous negative user reviews, but I think it's a mistake to read too much into them. The closest parallel is our investment in Herbalife -- the customer reviews for Herbalife are generally damning and alarming, much more so than UHAL, but the stock has been a great investment because there's a core set of users who enjoy the product / business opportunity and are not submitting complaints on the internet, and there are enough of these happy users to justify future growth.
For UHAL, there are plenty of users who think it's too expensive, the service is subpar and the trucks are too old and rickety. There are also a lot of people who think McDonald's hamburgers are too greasy, that the iPhone isn't as cool as the Galaxy, and that Starbucks' coffee is too bland. They complain constantly on online user review websites, but those companies continue to show attractive user growth.
Sometimes, I just don't think you can draw a lot of conclusions from customer reviews for products that have a very large and fragmented customer base. Capacity utilization at UHAL is high, revenue is at record levels, Budget is restructuring its truck rental operations, and every day I see a UHAL truck on the road on sixth avenue in NYC when I look out the window at work. My conclusion is that the online customer reviews that I read for UHAL's and Herbalife's products are just not as material to the investment theses as they might first appear.
I didn't directly answer all your questions, because I think they all get back to the same point: UHAL has a large number of negative reviews and management doesn't seem to be fixing the underlying problem that's generating them. My response is simply that I don't think this large number of negative reviews are material to the investment thesis, because there are a sufficiently large number of positive experiences that will drive continued growth and justify the current valuation. If Herbalife has continued to grow unabated despite the vast number of people who hate their offerings, then I think UHAL should continue to grow nicely too. Let me know your thoughts.
|Subject||RE: RE: RE: RE: RE: RE: question|
|Entry||08/21/2013 10:20 AM|
I'd like to direct you to Gary H's review of his truck rental experience at the 3969 N Rancho Dr branch in Las Vegas: http://www.yelp.com/biz/u-haul-las-vegas-49
"I recently went to this location because it was recommended to me from another uhaul store..
Very rarely does someone impress you as much as Mike Johns did while doing some installation lighting work on my car. I recommend him highly to anyone wanting quality work done on their vehicle. He was professional, helpful and knowledgeable."
You should also look at Tawny C's review of the 640 W MacArthur Blvd branch in Oakland, California: http://www.yelp.com/biz/u-haul-oakland-19
"the guy that runs this business is very professional and courteous. would highly recommend renting a uhaul equipment or truck from here. and his brother is an automechanic too. just all-around nice guys from my experience dealing with them."
I think this helps justify a potential investment in UHAL.
|Subject||CL King upgrades to Strong Buy and $243 Target Px|
|Entry||09/16/2013 06:17 PM|
Stock up 8% today as CL King upgraded UHAL to strong buy and put on a $243 price target.
Contact Mitch Meisler at firstname.lastname@example.org for a copy of the report, and tell him Kerrisdale sent you.
This quote from the report sums it up: "shares remain unusually inexpensive at only 10.3x our current-year earnings forecast for a market leader with 20% operating margins, more than a 20% return on average equity, a non-cyclical business with a widening competitive moat."
Today's 8% rise takes the stock to 11x fwd earnings. It's worth 18x+. The stock is still dirt cheap at these levels.
|Subject||UHAL earnings look good|
|Entry||11/07/2013 08:15 AM|
AMERCO reported FY 2014 Q2 numbers after close on Wednesday, November 6th.
|Subject||RE: UHAL earnings look good|
|Entry||11/07/2013 08:16 AM|
AMERCO reported FY 2014 Q2 numbers after close on Wednesday, November 6th.
The numbers were again strong. EPS came in 25% higher, at $7.06 versus $5.61 in the year ago period. Revenue is up 12% and EBIT is up 23%.
The stock trades at only 12.4x LTM earnings. I think it's worth more than 20x, but even a rise to 15x would imply $250 per share. As well, revenue and earnings should continue to grow nicely in the near-term, and over the long-term, this company is a defensible business with competitive advantages and should grow larger year after year.
U-Haul appears to be benefiting from Budget's restructuring of its truck rental operations. In Budget's most recent quarter, Avis-Budget reported a 15% decline in average fleet size and an 8% drop in rental days. As CL King wrote in a recent note, "While Avis Budget is increasing focusing on the business customer, which may explain some of the improved revenues per day metric, we believe the improvement also suggests that pricing is improving in the self-moving truck rental business. This bodes well for U-Haul given its high fixed costs. We would view Avis Budget’s de-emphasis as a major positive for UHAL’s prospects."
In addition to the truck rental operations, AMERCO real estate division is showing attractive growth. Self-storage revenue was up 20% in the quarter, and average monthly occupancy rate based on room count grew to 85% from 83.3% last year. The company continues to invest in self-storage real estate, and square footage grew 6% year-over-year.
|Entry||02/10/2014 12:20 PM|
AMERCO reported FY 2014 Q3 numbers after close on Wednesday, February 5th.
The company currently trades for 13.5x LTM earnings, 6.5x EV/EBITDA and 9.5x EV/EBIT. These multiples remain too low for the quality of UHAL's business. I think this stock is worth more than $300.
|Subject||RE: Question on CapEx|
|Entry||02/27/2014 01:25 PM|
A) Gross vehicle purchases are disclosed in the company's filings. For instance, in the 2012 10K, the company discloses "During fiscal 2013, the Company placed approximately 20,800 new trucks in service." In the 2011 10K, the company discloses "During fiscal 2012, the Company placed approximately 22,600 new trucks in service."
B) We don't have detail on % of fleet that's leased versus owned. Your thinking regarding how leasing versus owning impacts EBITDA versus capex spend is accurate. With respect to how we view the company's decision to lease versus purchase new vehicles, we're comfortable in the long-term oriented nature of management to trust that they're making intelligent decisions on whether to lease versus own. Typically, my experience with trucking companies is that it's better for long-term value creation to purchase trucks rather than to lease. In a similar vein, management is making capital allocation decisions on whether to purchase versus rent real estate for its self-storage facilities. Again, this is a management team that has been operating a vehicle rental and self-storage business for decades, and I don't have special insights on whether they should rent/lease versus purchase their trucks or self-storage real estate, but am rather comfortable at leaving these decisions to management discretion.
|Subject||New Sidoti Coverage|
|Entry||04/14/2014 10:40 AM|
Sidoti launched coverage of UHAL last week, with a Buy recommendation and a $310 price target. Analyst coverage of underfollowed names is always a good thing, but in the case of UHAL, I think this is a particularly noteworthy catalyst. UHAL was only covered by one firm, CL King, prior to Sidoti. Part of the reason why I think the stock has remained cheap is because of the limited sellside coverage, and Sidoti has an extensive reach into the buyside community.
Additionally, the Sidoti report is particularly good and Rob Dunn is an excellent analyst. Continued earnings previous and reviews, ongoing discussion of developments, invitations to Sidoti's conferences, and occasional non-deal roadshows will help boost the company's profile in the investing community.
In the valuation section, Sidoti puts together a sum-of-the-parts analysis that gets them to $310 per share, which equates to 16.5x CY 2014E P/E. I think 18x-20x forward P/E, which would get you to $340-$375 per share, can be reasonably justified as well, but I'll take $300+ for the time being.
|Entry||05/29/2014 09:36 AM|
AMERCO reported FY 2014 Q4 numbers after close on Wednesday, May 28th.
Net income increased by 25% to $39 million from $31 million in the year ago period (net of a one-time insurance gain in the prior year). Investors should note that this is a seasonally slow quarter; U-Haul's most active quarters are during the summer and back-to-school moving months that fall within fiscal Q1 and Q2 (quarters ending June 30th and September 30th). This quarter benefited from steady growth from all of UHAL's segments, along with continued improvement in margins.
The company also released its annual 10-k this afternoon. In it, UHAL discloses that the key components of its competitive moat continue to widen. UHAL's truck fleet has expanded to a record 137,000 trucks, while many of its competitors continue to retrench from the market. UHAL signed up an additional 1,000 franchisees in fiscal 2014, bringing their total network size to ~19,000 locations. Both fleet and network size now drawf its competitors. Going forward, management continues to see abundant attractive investment opportunities in both its storage and truck rental businesses.
The company currently trades for only 15x LTM earnings, 7.2x EV/EBITDA and 10.5x EV/EBIT. These multiples remain too low for the quality of UHAL's business. I think this stock is conservatively worth more than $300, and a legitimate argument can be made for $350.
|Subject||UHAL Earnings update|
|Entry||11/06/2014 01:38 PM|
AMERCO reported FY 2015 Q2 numbers after close on Wednesday, November 5th.
|Subject||UHAL earnings update|
|Entry||02/06/2015 10:09 AM|
AMERCO reported FY 2015 Q3 numbers after close on Wednesday, February 4th.
|Subject||kerrcap - latest thoughts?|
|Entry||06/05/2015 05:06 PM|
What's your view here at $325 / 16x LTM EPS? Thanks in advance for keeping us updated.
|Entry||02/08/2016 08:59 PM|
UHAL is still a great business that'll compound nicely over time. We own it. Earnings were good. I think we reduced at $400 because we had some other nice names in our portfolio that we were also excited about. At $315, 20% lower, UHAL has certainly become more attractive.
|Subject||Re: Author Exit Recommendation|
|Entry||06/09/2016 08:59 PM|
Curious if there was anything other than valuation that prompted your recommendation to exit. Thanks.