“Once you have excluded all that is impossible, whatever is left, however improbable, must therefore be the truth”. – Sherlock Holmes
Can you imagine a business more vulnerable to this downturn than one that owns thousands of trucks and industrial real estate (warehouses) and whose demand relies on the housing market, the job market and discretionary spending? All of these are falling at double digit annual rates.
I’m talking about the small truck and storage rental business targeting the residential segment: people rent a truck to move their stuff if they bought a new place, if a new job takes them to a new location, or if they bought bulky goods like furniture or domestic appliances or other type of equipment.
Amerco (NASDAQ:UHAL), U-Haul's parent, is focused precisely on this segment with a couple of small insurance operations in the mix. Yet for the nine months through 2008 (the company’s fiscal year ends in March), the company’s moving business revenues are only down 2% compared to the same period a year ago. Profits, still on the black, are down about 40%. Their main competitor, Budget (NASDAQ:CAR), has lost about 9% in revenues and its EBITDA is down 78%. Analysts at C.L. King and Zack Investment research say that the company is gaining market share and are relatively positive on the company’s prospects. True, the company could benefit if some people previously using full service movers downgrade to DIY (do it yourself) but I have my doubts. In my view the company is in a major revenue deceleration and already racking or about to rack substantial losses.
The company’s management in the earnings calls and in the discussion of operations section of their filings hardly concedes that there is a major crisis in their market, preferring instead to talk about inclement weather. This indicates a management that is either in denial at best or is disingenuous at worst.
Their financial reporting relies on substantial subjective judgments. The disclosures on the financials are deficient. The track record of corporate governance is very bad - this is a company that had to restate seven years of financial statements just before filing for bankruptcy in 2003 (which the company blamed on its then auditors, PWC…).
When one checks Amerco’s corporate website, the company posts on the home page the charters of the Independent Governance Committee and of the Audit Committee Charter. All of these look like boiler plate documents, and I have never seen these documents as prominently displayed in any other company’s website, which makes me wonder what the intention is. I sent a list of questions to the company’s Investor Relations’ e-mail address but my email was not even acknowledged.
Below is a list of red-flags upon which I base my concerns:
- The company has doubled its debt since emerging from bankruptcy in 2004, from about $800 million to about $1.6 billion, but their sales have remained flat over the period at about $2 billion.
- There are very large volumes of related transactions of questionable business rationale, including annual commissions of over $30 million, and $300 million in several related party loans. The company discloses this on its filings but that does not eliminate the fundamental concerns about how these transactions emerged in the first place and there is no credible/ independent validation of the prices and fairness of these transactions. Paul Shoen a dissident shareholder and member of the controlling family has sued (so far unsuccessfully) his brothers for according to the lawsuit siphoning over $200 million from the company.
- There is a line item worth about $130 million labeled “other assets” for which there is no explanation in either the last 10Q or 10K.
- The company has about $2 billion in net book value of warehouse properties and rental trucks which are fast depreciating assets. The company has provided about $180 million in residual guarantees on some of its truck leases. In the 9 months to December 2008 the company has lost about $15 million in sales of rental equipment, substantially more than in previous years. I would expect the losses to get accentuated in the quarters ahead, as the company has announced the sale of 13,000 trucks, which is twice their usual volume in the last few years.
- The insurance business is (at least) under stress. The life insurance company’s annuity contracts outstanding have been shrinking at a 10% rate for the last two years. The company caters to these products to the senior segment, and I would expect buyers to be more skeptical in the post-Madoff/Stanford world and redemptions to accelerate as retirees’ portfolios got hammered by the bear market. To satisfy these redemptions the company will have to realize losses on its investment portfolio and recognize them in their earnings by shifting some of the comprehensive income losses above the line (in the 9 months YTD the company had about 10 million of below the line losses deemed as temporary impairments).
- On the property and casualty insurance business, the company has systematically underserved for unpaid losses (a contingent liability). Over the last ten years this deficiency of reserves, on a percentage basis, has been 3 times as large as at Allstate and 5 times as large as Chubb’s. The reinsurance recoverable asset line item seems extremely inflated and out of proportion with unpaid losses and with ceded premiums. Premiums ceded to reinsurers have been only between 2% and 15% of the total approx. yet reinsurance receivable is about 60% of the reserves for unpaid losses and about 40% of the total assets of the P&C company.
- Although the company states that “the assets of our insurance business are generally unavailable to fulfill obligations of non-insurance operations”, AM Best’s April 2008 rating reports on Oxford Life Insurance Company (available on Oxford’s website), while rating the company B+, noted that “the Company has substantially reduced its affiliated investment holdings”, no further information is provided and there is no disclosure on Amerco’s filings on this. This would be quite concerning if true - is this a mistake by the rating agency?
The company has (i) $300 million worth of related party assets, (ii) the $130 million of unexplained “other assets”, (iii) the declining value of its $2 billion worth of property and trucks, and (iii) a possible overstatement of reinsurance recoverable and understatement of unpaid losses. Applying reasonable adjustments to these items, one reaches the conclusion that this company may be severely undercapitalized.
Finally, to be my own devil’s advocate, it is fair to point out that when the company underwent bankruptcy (from which it reemerged without impairing any lenders or stockholders) it was under intense scrutiny which included investigations by IRS, SEC and no wrongdoing was ever proven but we’ve all learned how ineffective government agencies can be if there is no smoking gun. In addition, one of the family members who control the company has done a large amount of stock purchases in recent months which can be seen as a bullish sign, however it can also be the action of someone deeply and emotionally committed to their business as the controllers seem to be.
In conclusion, I recommend “caveat emptor"; investors ought to exercise extreme caution and avoid this stock. I have a small amount of puts on the stock but am NOT loading it up currently. Although it is true that when the tide is out, you usually find out who has been swimming naked, this company has ample liquidity with $300 million in cash, most of its debt is very long term and has demonstrated resilience and a certain sophistication throughout the years.
Disclosure: Author has a small amount of puts on the stock but is NOT loading it up currently