Description

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+.

Company Description

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.

Valuation

EV/EBITDA: 4.9x
P/E: 10.6x 

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.

Business Overview

Amerco owns three primary business lines:

• U-Haul equipment rental – The ubiquitous orange-painted moving trucks, vans, and trailers
• U-Haul also has the largest network of propane refilling stations and is the largest seller and installer of trailer hitches
• Storage Real Estate – Amerco now generates a substantial portion of its profits from its self-storage facilities, many of which are located at U-Haul Centers
• Amerco is taking advantage of the natural synergy between people moving and also needing temporary storage for personal items to provide a one-stop moving solution for customers
• Insurance – Amerco owns two small insurance businesses, Repwest (vehicle insurance for U-Haul rentals) and Oxford (life insurance)

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.

Benchmarking Analysis

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.   

Real Estate

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

Management

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). 

Insurance

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.

http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-Insurance-Subsidiary-Historical-Financials.gif

Capex

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: 
http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-CapEx-Summary.gif
http://kerrisdalecap.com/wp-content/uploads/2012/11/Amerco-CapEx-Cash-Flow.gif

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. 

Founding

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.

Catalyst