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Summary and thesis:

At current levels we believe AMERCO (NASDAQ:UHAL) represents an extremely attractive investment – very strong downside protection and very large long-term upside with the potential for a near-term catalyst.

UHAL is no stranger to VIC and its business is familiar to almost any person in the US. In short, UHAL is comprised of two businesses: 1) rental of trucks and related moving equipment; 2) owner/operator of >50mm square feet of self-storage. UHAL has a dominant position in truck rental and possesses tremendous brand equity due to its long history and cultural and physical ubiquity.

For background, we’d recommend previous VIC posts and the Company’s material.

Our write-up will focus on the most salient thesis points:

-          The business is stronger than ever and the market overestimates UHAL’s COVID benefit.

-          UHAL’s brand equity and related competitive moat is underappreciated.

-          The stock is cheaper and the business more overcapitalized than ever.

-          Management talks openly about taking actions to close the long persisting valuation gap.

The business is stronger than ever and the market overestimates UHAL’s COVID benefit:

Below are summary consolidated results since FY12 (our figures adjust for any exceptional items):

What sticks out, of course, is how dramatically earnings improved in FY21 and FY22. We believe that has caused the market to conclude that UHAL was a COVID beneficiary, and the earnings bump will prove transitory. We think that view is misguided; rather, two dynamics – aided and accelerated by COVID – drove structurally sustainable earnings growth:

Lease-up of self-storage properties:

Over the last 10+ years, UHAL invested massively in expanding its self-storage footprint. Many of UHAL’s projects were retrofits and ground-up developments that came online with zero occupancy but near full expense burdens. That resulted in significant upfront losses creating a huge drag on margins. As the rate of change of self-storage square footage slowed and as COVID created strong self-storage demand, UHAL’s occupancy rates improved significantly:

We believe UHAL’s occupancy improvements will prove incredibly sticky. We’d also note that UHAL took much less pricing over the last 24+ months than its publicly traded REIT peers.

More than that, UHAL still has much further to go in occupancy gains. In its F1Q23 earnings release, the Company noted: “The occupancy ratio for the subset of these properties that have been stabilized at 80% for the last 24 months increased 1% to 98% during the quarter.”

Incremental occupancy gains will yield extremely high margin revenue.

Truck and equipment rental price increases:

While COVID provided UHAL some transaction growth, the Company significantly benefited from catching up on 10+ years of rate growth it ought to have already taken. As the table below highlights, revenue per truck or per total equipment piece was basically flat (with some undulations) from FY10-FY20 before moving up nicely in FY21 and then much more in FY22.

UHAL generates huge margin leverage on pricing gains.

We believe the price increases are sticky, a view echoed by UHAL’s perennially uber conservative CEO (F4Q22 CC – 5.26.22): “There's been some rate gain through that, and I don't think we're going to have to give that back. I think that's going to stick. So, I don't see the -- it so much as a bump is maybe a step-up that's what I'm starting to see. That's what I've been working towards.”

UHAL’s brand equity and related competitive moat is underappreciated:

The data below (from Similarweb, with permission to republish) shows the incredible brand equity UHAL possesses – the key upshots are:

-          UHAL has 10x more monthly website visits than its nearest truck rental competitors while relying on 1/5^th the paid search traffic

-          UHAL has >5x more monthly website visits than its nearest self-storage competitors while relying on 1/5^th the paid search traffic

-          UHAL is incredibly dominant in organic search. The vast majority of UHAL’s traffic is organic search and it has 10x more than its closest competitors.

Cost-per-click for UHAL’s traffic is generally in the $3 range. For LTM, UHAL generated >200mm visits from organic traffic, or >$600mm worth of unpaid marketing.

UHAL’s unrivaled brand equity translates into unrivaled organic search which yield structural and sustainable customer-acquisition-cost advantages enabling industry leading ROIC.

The stock is cheaper and the business more overcapitalized than ever:

UHAL has never traded so cheaply on either an EPS or SOTP basis.

For LTM, UHAL generated GAAP EPS of $57. However, we believe UHAL’s accounting is incredibly conservative, and LTM economic EPS was $66 or more. To highlight one issue: UHAL’s LTM GAAP EPS includes self-storage depreciation of >$200mm. However, benchmarking against publicly traded self-storage REITs implies UHAL’s self-storage maintenance CapEx is only $20mm. With that adjustment, EPS is $66. For a variety of reasons, we believe even $66 meaningfully understates economic EPS.

So, UHAL is trading somewhere between <8x-10x EPS.

Publicly traded trucking and rental companies trade at 12x EPS, and none have as high of margins or ROIC as UHAL (let alone UHAL’s unrivaled brand recognition). Publicly traded self-storage REITs trade at >20x AFFO and <4.5% cap-rates.

The table below provides a snapshot of how we think about UHAL’s risk-reward. We think our bear case is absurdly conservative and our bull case reflects a positive scenario but is far from a “best-case” scenario given the genuine optimism we have for UHAL’s businesses, management’s ongoing value creation, and the chance UHAL eventually trades at nearer to fair market value.

Also, we’d note that UHAL is massively overcapitalized and underlevered. UHAL has almost $3bn of cash on its balance sheet (Moving & Storage Consolidated) and net debt of $3,250mm vs. LTM EBITDA of $2,120mm. The Company has reduced net debt from $4,150mm at year-end FY20 to $3,250mm even as EBITDA has almost doubled over that time frame. The Company has the financial wherewithal to conduct large repurchases which would be the best way to both highlight and take advantage of UHAL’s dramatic undervaluation (share repurchases would be highly accretive to both EPS and intrinsic value per share).

Management is talking openly about taking actions to close the long persisting valuation gap:

While UHAL has never traded so cheaply, it has long traded at a meaningful discount to intrinsic value. For the first time, CEO (and largest owner) Joe Shoen speaks explicitly about taking actions – in the near term – to help reduce the market price vs. intrinsic value gap: 

F3Q22 CC – 2.10.22: “It's a question that is regularly discussed at the Board level, and we're trying to figure how to do that. And hopefully, we'll have some news for you before the year is out, but we'll see…We're doing a lot of thinking. I don't know that there's anything that I can say publicly other than it's a very active discussion. I have a fairly active Board of people who, I think, have very balanced outlook and they put lot of effort into having long-term wealth maximization for the shareholders. I don't know if there's anything I can say beyond that without I'd just be talking just make the SEC mad or something.”

F1Q23CC – 8.04.22: [To the question about doing a variety of things to close the valuation gap] “I think you'll get -- you'll see over the next several months input on every one of those…”

Conclusion:

-          The business is stronger than ever and the market overestimates UHAL’s COVID benefit.

-          UHAL’s brand equity and related competitive moat is underappreciated.

-          The stock is cheaper and the business more overcapitalized than ever.

-          Management talks openly about taking actions to close the long persisting valuation gap.

We’d lastly note: since it’s November IPO 1994, UHAL has generated a 13.3% CAGR (33x) vs. 11.7% (22x) for BRK vs. 8.2% (9x) for S&P 500 – very impressive returns despite the ridiculously low multiple it currently trade at and a very under-optimized capital structure

Catalyst

See above