Amerco: To Move Or Not To Move, That Is The Question

Summary

• UHAL has benefited from recent pandemic-related moves, the migration away from big cities, and shifts to digital nomadic employment.
• UHAL revenue and profitability surged during the pandemic.
• They have strong operating cash flow ($1.99 B, TTM) and a pile of cash on their balance sheet ($1.5 B).
• The strong tailwind is likely to continue for the next couple of years, but beyond that is highly uncertain.

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Investment Thesis

Amerco (NYSE:UHAL) is the largest "do-it-yourself" moving and storage company, more commonly known as U-Haul. I believe UHAL presents a great investment opportunity for a shorter-term timespan (~2 year), but is an uncertain bet over a long time horizon, because:

1. While I do expect a large tailwind from pandemic-related moves, migration away from urban centers, and the digital nomad trend to continue for the next couple of years, I also anticipate that it may calm down afterwards.

2. UHAL has very strong cash flow from operations and a large pile of cash in their balance sheet to support expansion.

3. Their valuation metrics show that they are undervalued at this point.

Large tailwinds, but it may slow down in a couple of years

UHAL, and self-moving companies in general, have been experiencing a huge tailwind since the pandemic started. In the past year and a half, a larger than average number of people have moved for various reasons: job loss, fatigue of densely-populated areas, and upswing of the digital nomadic lifestyle. Thanks to these trends, UHAL revenue jumped from 6.35% (5 year average) to 29.35% (TTM).

Their margins have also improved: net income margin from 13.65% (5 year average) to 17.27% (TTM) and EBITDA margin from 32.51% (5 year average) to 38.35% (TTM). Given that a large number of people are still switching jobs and relocating away from big cities, I expect UHAL's growth to stay strong for the next couple of years, but then return to pre-pandemic levels as the relocation trend subsides. Relocation may thus peak in the near future and then start to decrease as people find a preferred location and choose to settle into their new lifestyles. There is significant uncertainty in what "normal" relocation levels will look like several years from now.

Source: Graph from MyMove Article

Source: Graph from Bloomberg Article

Strong Cash Flow and Pile of Cash

UHAL has always been strong at generating cash. Cash from operations grew from $669 M in 2012 to $1.5 B in 2021, and this positive trend will likely continue for the next couple of years. Thanks to this strong cash generation, their Cash & Short-term investment accounts grew from $407 M in 2012 to $1.2 B in 2021. Also, this large influx of cash provides strong liquidity (current ratio of 1.8 and covered ratio of 7.96), and UHAL is in a good position to expand their fleet of trucks and number of storage units to meet the growing demand. Their operating cash flow trend is shown below.

Data by YCharts

Reasonable valuation even with strong recent growth

Even with this strong tailwind and pile of cash, the valuation of UHAL remains more than fair at this point. Their P/E ratio (16.08) and EV/EBITDA (8.69) are below sector median. Combining a strong growth trajectory, pile of cash, and low valuation, I believe UHAL stock is undervalued at this point, even despite the uncertainty in long term growth. I expect UHAL stock to continue upward for the short term until the valuation is on par with the sector and peer group.

Source: Table from Seeking Alpha

Intrinsic Value Estimation

To estimate the intrinsic value of UHAL, I utilized a DCF model. I used the 2021 EBITDA ($1,587) as the cash flow proxy and current WACC of 7.2% as the discount rate. Since I expect cash flow to grow over the next couple of years but then start to decline, the model used the following schedule (given in the table below) as the cash flow trajectory with zero growth afterwards. I believe this constitutes a conservative assumption (year 1 growth of 14% is about half that of the most recent YoY growth, 29.35%).

Year	0	1	2	3	4	5
EBITDA	$ 1,587	$ 1,784	$ 1,942	$ 1,587	$ 1,587	$ 1,587
	% Increase YoY	14%	9%	-19%	0%	0%

Click to enlarge

Source: Table created by author to demonstrate cash flow trajectory assumption

The DCF estimation revealed that the current stock price of UHAL represents an upside of 15-25% (target price of $887.57). The ongoing trends toward remote work environments and migration away from large cities will certainly bring positive revenue growth and profitability for UHAL over the next couple of years, so I believe this upside is warranted.

Risk

As mentioned previously, I don't foresee population migration to continue indefinitely, but there is significant uncertainty as to "when" the trend will start to subside. Given that a large number of people have recently quit their jobs, I believe it is safe to assume that significant relocation will continue for the next couple of years, but then probably return to more historical levels afterwards. Since UHAL's revenue is likely to peak and then decline, the long-term uncertainty may limit the stock price upside, and possibly even cause a hard fall-off when moving volume drops.

The nature of the business requires significant capital to purchase land for storage units and trucks for rental, so UHAL carries a large debt on their balance sheet. Therefore, increasing interest rates in the future may negatively impact the business. However, the operation has the ability to generate large amounts of cash and the business sits on a pile of cash. This will carry them through short-term periods of hardship and potentially higher interest rates.

Conclusion

I believe UHAL is a great business with a strong outlook. They are the largest "do-it-yourself" moving and storage operator in the country, and have powerful cash generation. I expect the current tailwind for UHAL to continue for the next couple of years, and their stock price to rise accordingly. However, the migration surge will likely subdue after a couple of years, which may limit the upside of UHAL.

Whether the shift towards remote work will have the long-term effect of elevating the frequency of moves, or whether it will merely redistribute demographics, is unknown. I think UHAL is a good opportunity for a shorter-term investor with a sub-2-year time span, and worth a watch list consideration for a longer-term investor.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.