Amerco - An Undervalued Compounding Machine

| About: Amerco (UHAL)

At its current level, we believe that Amerco (U-Haul) (NASDAQ:UHAL) represents an opportunity to invest in an enduring wide-moat business that will continue to compound intrinsic value at above average returns on equity. As it stands, Amerco currently trades at approximately 7 times EBITDA and 8 times pre-tax earnings. Its current ROIC of 12% is understated given its substantial investment in real-estate storage assets; ROIC of its core truck rental business is upwards of 22%. Amerco carries significant real estate at historic book value that has been purchased since the 1960s. Moreover, EPS understates owner earnings because of increases in capex related to fleet expansion and renewal; capex will drop over the forthcoming years giving a boost to free cash flow.

We believe that Amerco's long-term earnings power is being unduly discounted by Mr. Market for the following reasons:

  • A lack of institutional following because of a small float. Only about 30% of the shares outstanding comprises the float while the Shoen family controls 70%. This has lead in the past to governance issues (see its history). Analyst coverage is also virtually non-existent.
  • Lack of a dividend turns away institutional and retail investors. Also, the very name of the company Amerco hides what is a significant brand, U-Haul.
  • A turbulent history, including a (covenant induced) bankruptcy in 2003.

Based on our projections, we believe that Amerco will compound its intrinsic value above 20% over the next 5-10 years. We estimate a conservative fair value of $350-$400 or about 30% undervalued based on a recent trading range of $260-$280. Moreover, we believe that Amerco's earnings power is significant enough that even were the current price to book multiple of 2.93 to decline to 2 over the next five years, the share price would still see a net CAGR appreciation of 16%, above a hurdle rate of 15%.

While Amerco operates in a commoditized do-it-yourself market, we believe that its current and future earnings power based on its dominant position, pricing power and shareholder friendly management provides a significant margin of safety in an endurable business model.

Business Overview

Amerco, better known as U-Haul, is the king of Do-It-Yourself moving and storage operator in the United States. Chances are, no matter where you're driving, you will run into a ubiquitous U-Haul truck on the road. Between 2012 and 2013, the US census bureau estimates that 36 million people in the US moved. One of the consequences of the financial crisis of 2008-2009 is the increasing number of people choosing to rent versus purchasing a home. In a report entitled "America's Rental Housing: Evolving Markets and Needs" by the Joint Center for Housing Studies of Harvard University, the percentage of people renting versus buying a home went from 31% in 2004 to 35% in 2012. One of their arguments is that demand for rental housing will continue to increase, possibly signifying secular trend in the foreseeable future. The implication for an increasing share of rental accommodations versus home ownership is that a greater share of the population becomes more mobile. We believe that increasing economic insecurity, home ownership becoming less attainable and where a greater number of college students weighed down with student debt creates the conditions for a secular trend in population mobility intra-city and inter-city. Over the next 5-10 years, this will provide Amerco with an increasing revenue stream.

Created in 1945 by L.S. Shoen, Amerco grew through a franchise model based on gas stations. However, the company ran into trouble for a multiple of family reasons beginning in the 1980s leading to the unsolved murder of Sam Shoen's (L.S.'s son) wife Eva in 1990. The family squabbles took a significant toll on the company including a $400 million dollar judgment in favor of L.S. Shoen. Later on, in the late 1990s and early 2000s, Amerco began acquiring real-estate storage assets through a special asset vehicle called SAC Holdings run by Mark Shoen a director at the company. Because of accounting rules, Amerco had to merge SAC's accounting with its own including its significant debt. The result was a forced bankruptcy in 2003 triggered by covenant rules. Amerco reemerged from Chapter 11 in 2004 with its creditors paid in full and with a credit facility of $500 million from Wells Fargo (NYSE:WFC).

For a more detailed discussion of Amerco's history, its internal conflicts and general bullish take, I would recommend Kerrisdale Capital's 2013 write up.

Currently, Amerco is structured according to three reporting segments: Moving and Storage comprised of U-Haul truck rental and its storage facilities, Property and Casualty Insurance and Life Insurance. By far Moving and Storage provides the bulk of its revenues: Net percentage revenue for the Moving and Storage segment was 90.6% for fiscal year 2014. Amerco has approximately 127,000 trucks, 98,000 trailers, and 37,000 towing machines (2013, 10-K). They have 1,540 company owned and 17,400 independent dealer locations. By comparison, Avis Budget (NASDAQ:CAR), its closest competitor, has approximately 23,000 trucks at 1,300 dealer operated and 350 company owned locations (CAR, 2013, 10-K). Furthermore, Avis Budget has been downsizing its vehicle count while Amerco has been growing its own fleet since 2004 from 93,000 to 112,000.

Amerco's infrastructure gives it a sustainable long-term competitive advantage. In recent call, CEO Edward Shoen was asked about tightening competition and this is what he had to say:

Well, I - just a variety of people are starting to think this is a easy money business. So we'll pick Enterprise. Enterprise has spent 10 years trying to get into this market. They're doggedly pursuing it and they're tightening it and we're having to respond to them every day. There is - what happens is, of course, as soon as we get a little bit of success, then everyone thinks this must be a good place to put additional capital….The - over the years there have been many, many people who think they can finance some trucks and get into the truck rental business. And indeed, they can. You, I'm sure, have seen ABF. ABF is determined. They're sure that they can be in this business. And so they're just going to come in, that's all and we're going to deal with them one at a time or the customer will deal with them. We're going to serve the customer and let the customer decide who they want to do business with.

What fundamentally defines Amerco's competitive advantage is its ubiquitous infrastructure across the US, the ease with which consumers can rent trucks close to their location in most metropolitan locations, and the fact that this allows for substantial inter-city moving revenue: this provides Amerco with significant economies of scale. Likewise, this competitive advantage result in significant pricing power, particularly in the inter-city moving where logistical issues becomes much more complex.

Financial Performance

Between 2004 and 2014, TTM Amerco's revenues have grown CAGR by 3.43%. However operating performance has substantially increased: Gross Margins have increased from 15.8% in 2004 to 40.6%; Operating income grew by a CAGR 13.10% from $167 million to $647 million.

In large part, this increase in performance is the product of a significant investment in fleet renewal, company owned stores and storage real estate. Amerco is evidently not in a capex light business. From 2004 to 2014 gross capex increased by approximately $787 million. Nonetheless, the resulting increase in capex results in an increase in market share of the rental market and continued acquisition of real estate storage assets.

We currently believe that the ROIC of 12% is understated because of its real-estate segment. A long-term ROIC of the moving rental segment of 20% to 25% is more accurate (based a segment NOPAT of $406 million and Invested Capital of $1,685 million (minus real estate assets).

Valuation

Based on the figures above we estimate a maintenance capex of approximately $408 million or 14% of revenues. We therefore estimate "owner earnings" of $21 per share for TTM or 16% above TTM EPS of $18.09. (Amerco is currently trading at 12.85 times owner earnings). At a return on equity of 20% and price to book multiple of 3 we estimate a share price in the neighborhood of $750-$800 or CAGR of 22%-25% in 5 years. If we assume that the price to book multiple falls to 2, then we get a CAGR of 16%.

Disclosure: The author is long UHAL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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