Amerco (NASDAQ:UHAL) has seen a plethora of growth in the past few years going from around $35 per share to an all-time high today of $228 per share. Looking at this extraordinary growth in the past few years makes it hard to believe that there can still be more upside. However, despite this growth, Amerco still trades at a 13.72x and 12.53x trailing and forward P/E multiple respectively which is still below the current 18.85x and 16.47x respective trailing and forward P/E ratio of the S&P 500. Additionally, in October, Kerrisdale Capital released an updated report on Amerco, raising its valuation to between $270 and $330 per share. This article will seek to show that this company is poised for continuous growth and deserves to trade at a premium to the overall market through a closer look at its ironclad business model, industry leadership, valuation, macro environment and management's adoption of shareholder value-driving policies.
Dominance in Truck Rentals
Amerco's unassailable dominance in the truck rental market has been and will continue to be a main driving factor behind its growth. In the Do-It-Yourself truck rental market, U-Haul is by far the leading player with a 50% market share versus the 10% market share that Penske (NYSE:PAG) and Budget (Nasdaq:CAR) each have. Furthermore, its two main competitors in this industry do not even have the do-it-yourself mover market as their primary focus as Penske and Budget see their main lines of business to be the commercial truck rental and car rental markets respectively. In fact, Budget has even scaled back its operations to around 26,000 trucks which is around a quarter the size of U-Haul's truck fleet. In the meantime, U-Haul has vastly expanded its network of trucks and locations to gain the scale needed to dominate the market. In the past four to five years, U-Haul has increased its truck fleet from 96,000 trucks to 112,000 trucks, its company-owned stores from 1400 to 1490 and its franchised stores from 14,200 to 16,400. In effect, U-Haul's powerful network of trucks and rental locations make it extremely difficult for smaller competitors to compete, especially in the more profitable inter-city moving market, as it involves competing on convenience of location, managing complex logistics and a reputation for safety and reliability. Better yet, as U-Haul continues to increase its locations, franchisees will tend to be more and more inclined to join the U-Haul network to benefit from the brand name as well as the other locations in U-Haul's network to better service their own customers. This simply adds to the already attractive franchising model of U-Haul where businesses put their unused land and labor to use without having to put up any of the typical expensive start-up costs for franchising. With all of these factors in mind, it can be seen that U-Haul will continue to dominate this market in the foreseeable future and will most likely even increase its dominance.
Cross-Selling Business Model
U-Haul has really transformed its business from a rental service to an all- inclusive moving experience. It does not simply rent out trucks but has really integrated its self-storage business for movers who need a temporary storage space and offers a plethora of moving services and products that complete the do-it-yourself moving experience. Its sizable self-storage business, consisting of 445,000 storage rooms covering 40 million square feet of storage space across 49 states and all Canadian provinces, is now contributing around 30% of its cash flows. Although the storage business requires a high initial capital investment, it has very low operating costs and maintenance CAPEX which means that marginal revenues fall straight to the bottom line. Moreover, Amerco offers trailers, towing devices, packing supplies, boxes, gloves, moving pads and even property and casualty insurance through its insurance subsidiary Repwest. Amerco's businesses are strategically integrated to maximize cross-selling and drive margins, which is especially important in the intra-city truck rental market where there is little differentiation and multiple substitutes.
Management and Shareholder-value Driving Policies
Amerco's management is another important driving factor for its growth. Mark, Edward and James Schoen collectively own 46.6% of the outstanding common stock and have a stockholder agreement with two trustees to vote as one, representing 55.6% of the company's stock. This inevitably means that management's long-term wealth is tied to the long-term value of the stock rather than their salaries. Consequently, management has kept a focus on long-term growth and does not find a need to cater to equity analysts, institutional investors or quarterly earnings expectations. Furthermore, management has adopted many policies that have helped to drive shareholder value. It has retired the 8.5% preferred stock that made the cost of capital high and has announced increasingly high special dividends ($1.00 in 2011 and $5.00 in 2012). It can be expected that management will continue to try to maximize shareholder value in the future. In addition, management has taken many other measures to achieve high asset utilization. They implemented constant improvements to their logistics models and transitioned from a phone-based reservation system to modern internet-based systems, which accelerates fleet optimization and predicted equipment use. Management also figured out that offering discounts to entice customers to move back trucks to their origination points was especially effective to avoid running low on trucks in big urban centers. Through all of these measures, Amerco has kept revenue per truck (a good proxy for asset utilization) fairly consistent over the years while increasing their fleet, leading to direct increases to the bottom line.
With the recovery of the US economy and the factors that come with it (increased housing starts, consumer spending, credit availability and housing changes), the industry future looks bright for Amerco as well. However, even though Amerco does better with a growing economy, it does have a very recession resilient business model as well. In times of recession, displaced homeowners are still in need of Amerco's storage and moving services. Additionally, Amerco has a very flexible capital base and in the recession of 2008, simply retired more vehicles than it purchased and downsized its capital base to keep ROE high.
In summary, with all of these factors in mind, it looks like Amerco will continue to assert its dominance and increase in value. In conclusion, Amerco's dominance in the truck rental market, continued growth in storage, amazing cross-selling capabilities and competent management makes this an attractive stock to buy into and keep for the next few years.